Four Strategies For Managing Business Inventory
In 2013, Walmart lost $3 billion due to poor inventory management and suffered frequent out of stock instances. Poor inventory management affects large businesses (like Walmart) and small ones alike. It is important to recognise the impact this could have on your bottom line and future growth.
So what can you do to prevent the same catastrophe happening to your business?
1. Make sure you hold as much stock than you need
While debt finance has been accessible and rates low in recent years, many businesses have been lulled into a false sense of security that they can take advantage of a “good deal” and save money by “bulk buying”. However, this kind of buying leads to disaster as your free cash flow dries up and interest rates start to rise.
Holding more stock than is needed is never a good idea. Excess stock is dead money and takes up space, potentially leading to higher rent costs. Excess stock also locks up your cash flow. As interest rates increase excess stock can become expensive to maintain.
No doubt you’ve heard of lean manufacturing and “just in time” ordering in the manufacturing environment. Lean manufacturing originated in the Japanese manufacturing industry to minimise waste. The aim is to have just enough stock for the production cycle at any point in time. This keeps cash requirements for maintaining stock levels low. Lean manufacturing may not always be as easily applied in other environments, such as stock imports or orders requiring a long lead time suppliers. However, wherever possible it you should think about applying it to your business.
Advisers and accountants often talk about your “stock turnover” in terms of your business operating cycle. Stock turnover is the number of times in a year your inventory is completely turned over. If say, your cost of goods sold is $300,000 and you hold $100,000 in stock, your turn rate is 3 times. From a business management perspective the higher the rate of stock turnover, the lower the amount that you have invested in inventories and the lower the risks for your business.
Business Queensland provides a handy stock turnover calculator to assist small businesses.
You will need to consider your buying patterns. You obviously need to have enough stock to meet customer demand. However, where possible, think about ways to order less inventory more frequently.
Although volume discounts and shipping costs can mean the price per unit may increase for smaller orders, take the time to compare this to the cost of holding a greater quantity of stock for longer than needed. There is the financing cost, warehouse storage space (rent costs), and opportunity cost - loss of ability to use your money elsewhere if it wasn’t tied up in stock.
An understanding of your sales patterns (that is, which items customers are buying, when and how often) is essential to inventory management. Consider using systems to track and analyse this data to assist with inventory management.
2. Better accessibility and visibility to your inventory
Make sure your stock is stored in an orderly manner and is accessible and visible when you need it. You don’t want to be in a situation where your inventory management system indicates you have items in stock but you can’t find them for your customers. You can’t sell stock you don’t know you have. Good organisation of your storage area will keep things in plain sight and at hand when needed.
Consider investing in good inventory tracking software or add-ons to your accounting system. This will help streamline your stocktake and help maintain up to date information about your stock holdings. There are many different stock management applications that can integrate to your point of sales and inventory management systems. Some of these are tailored to your industry and save even more time with establishment. IMT Accountants & Advisors provide business coaching services to help you select the best option for you and your business.
The high profile collapse of Dick Smith is a good example of poor stock arrangement. Dick Smith is reported to have held up to 12 years’ worth of batteries. Proper use of inventory management systems to track sales trends would have avoided situations like this.
3. Maximise the credits offered by suppliers
Supplier terms of trade are an important part of your buying strategy. Occasionally, suppliers offer generous credit terms that can serve as a low cost tool in funding your inventory.
As we transition towards a digital marketplace and eCommerce, small businesses might also find it easier to purchase goods direct online. This will generally mean that payment is required at the time of ordering (removing any benefits from extended payment terms). However, you may be able to source a better per unit price this way, provided you have the free cash flow to fund the purchases.
The traditional approach is to negotiate suitable trading terms with your “bricks and mortar” supplier. Matching your stock orders to the payment terms offered will help you maximise your cash flow. For example, if your suppliers offer 30 day terms, consider ordering only enough stock to cover 30 days sales.
Where possible, look at negotiating terms based on a set number of days “end of month”. This means stock will be payable a set number of days into the following month, irrespective of when it was ordered during the current month. Consider ordering inventory earlier in the month to maximise the number of days you have available to sell the goods before having to pay for them.
4. Take action before the “best before” date
Consider the saleable life of the product. Is there a risk that it will become obsolete or spoiled before you can sell it? Does it have any “use by” or “best before” date considerations. The more stock you hold the higher the risk that you may have to dispose of it before you can sell it.
Slow moving stock poses a problem for many business owners. While we all want to maximise the profit margin on our stock purchases, it is important to be proactive and discount the stock when it appears some items are moving slower than expected or that the market has moved onto a newer or different item.
A good understanding of your stock turnover and stock requirements will help you keep more free cash and clear out your storage areas. On the other hand, failing to implement thought out and proactive inventory management strategies is likely to cost you a lot more than you may realise.
Key takeaways
IMT Accountants & Advisors provide inventory management services for business clients. To see the list of services we provide visit: Our Services
Self-employment and independent contracting. The new norm.
AdministrationSelf-employment and independent contracting. The new norm.
Being self-employed today requires more than it did last generation. It now involves extending oneself in the modern workplace and shaking up the traditional employee-employer relationship. Applying a human resource perspective, let’s look at how your organisation can adapt and embrace this evolution. It is generally accepted that smoothly navigating the complexities of workplace change is important for Australian businesses. This is especially so when considering the rise of the ‘gig’ economy and the trend towards a contracting workforce and flexible workplace arrangements.
There is a continuous move towards self-employment. Globally, technological change and a shift away from the high regard for the traditional employee-employer relationship is leading to new business models that are being seen as more advantageous to traditional employment structures. The commercial and competitive outcomes of new digital technologies are obvious for leading businesses. However, less obvious is the breakdown in structural barriers to commerce and business which previously preserved the sanctity of traditional workplace relations. This breakdown has been caused by the rapid introduction of technology-based markets and applications that connect companies and consumers directly with freelance and contract workers efficiently and cost effectively. The efficiencies and benefits of large-firm infrastructure has, in recent years, become a yoke for medium and large enterprise attempting to adapt to rapidly changing nature of providing services and goods.
Examples of new technology assisting freelancers and contract workers include Freelancer.com and Airtasker, which have skyrocketed the progress of the work-on-demand economy. Consumer view this new technology as the ‘mainstay’ of their consumer activities. For example, it is not unusual to hear something referred to as “the Uber of” something, when referring to a new market entrant that is introducing disrupting technology. Crowd Sourced Fundraising, is another disruptive mechanism founded upon new technology (that connects consumer investors with young or small business entities which may not otherwise meet the lending criteria of traditional financiers).
In 2017, the Australian Government introduced the Corporations Amendment (Crowd-sourced Funding) Act 2017 permitting and regulating the raising of crowd-sourced funding, which was previously prohibited by the Corporations Act 2001. Whilst this was initially limited to public companies (companies which had at least three directors and are required to meet higher audit and disclosure requirements), the right to secure crowd-source funding was extended to proprietary (private) companies in 2018. Learn more about this capital raising avenue from Business Queensland - Crowdfunding finance (click on link).
The formal introduction and regulation of crowd-sourced funding has had a big impact on small ‘freelancer’ agencies being able to grow and engage with a variety of service providers in a new ways. The Board of Taxation has stated that the profile of Australian workers is evolving, with a greater number of ‘white-collar’ workers adopting forms of contracting and self-employment in many sectors such as management consultancy and financial services. This has been seen in the personal and domestic care services industry as well.
Currently, contingent employees – or freelancers – account for about 8.5% of the Australian workforce. This comprises about 1 million workers, and is expected to continue growing over time. Drivers behind this growth include benefits which are built into the core of the sharing and on-demand work economies, such as flexible working hours and the ability to work from various locations that fit in with family or other commitments.
In 2015, a survey of 1,300 contractor/freelancer workers found that 75% of participants listed flexibility as the main reason for choosing this type of work. This ranked higher than an increase in income. Self-employment is seen as providing greater security through control over one’s own destiny and risk mitigation of work through a broader client base.
What are some of the sticky points independent contracting and self-employment?
Workplace culture becomes diluted as a result of greater dispersion of the workforce. This can have implications for establishing cohesion between staff and restrict the development of company culture. Consequently, employee engagement may be lower than in traditional workplaces.
Safety and wellbeing programs can be more difficult to enforce and nurture. This is more easily implemented and the scope of the programs are not so broad when employees are present during set work hours in the same location. As work times, locations and conditions grow in combinations, workplace health and safety considerations increase drastically, which can add costs to an organisation’s operating budget.
Legal and human resource oversight can be difficult. There are legal implications for hiring a ‘contractor’ compared with employing a ‘full-time employee’? Sham contracting has come under scrutiny in the last couple of years as the government has identified a growing trend of employers engaging individuals as ‘contractors’ but treating them as employees. This has resulted in individuals being exploited. That is, having the obligations and pay of an employee without the lack of employment protection and certainty that employees enjoy.
More information can be found on Fair Work Ombudsman - Independent contractors and employees (click on link).
Another issue faced by organisations and freelancers alike is one of quality control. With less onsite supervision and induction time, it is becoming harder to achieve consistency between individual contractors. Uber, AirBnB and other sharing economy businesses use consumer ratings as a feedback mechanism for helping consumers set expectations about the service quality they will receive. It also serves as motivation for contractors to deliver the highest quality of service that they can provide. However, the onus still remains on the business (whether a self-employed individual or large company) to ensure the contractor has been trained well in the first instance.
KEY TAKEAWAYS
IMT Accountants & Advisors is a leading Brisbane accounting firm that provides advice on small business setup, for individuals looking to move towards a freelancer/independent contractor arrangement. We also provide advice to established businesses looking to take on new employees or independent contractors to ensure that it is done correctly in the first instances. For further details about these services, please contact the expert team at IMT Accountants & Advisors on 0400 755 855 or 0421 000 541. Click to see our full list of services.
Australian small businesses can access Government Grants
InsightsAustralian small businesses can access Government Grants
Did you know that the Australian and Queensland governments are giving generous grants to small businesses to help them grow?
Here is an overview of what’s available currently:
Business Growth Grant
The Business Growth Grant is available for owners who have received a business management service and the business adviser/facilitator recommends specific business improvement activities to increase your business’s capability to trade in Australian markets and/or markets in other countries.
The grant is for an amount up to 50 percent of eligible costs and the maximum grant amount is $20,000 (excluding GST).
Innovation Connections Grant
The Innovation Connections Grant provides businesses with access to a highly skilled facilitator, for the purpose of reviewing the research needs of the business. The facilitator will connect the business to expertise within the research sector and help to define a project scope, if required.
Up to $50,000 in matched funding support is available to businesses that choose to fund the project on the recommendation of the facilitator. This grant is open to businesses with an annual turnover or operating expenditure of between $1.5 million and $100 million. A lower threshold of $750,000 applies for businesses in remote Australia and the Norther Territory.
Wage subsidies
Wage subsidies provide Australian businesses with financial incentives of up to $10,000 (GST inclusive) to hire and retain eligible job seekers in ongoing and sustainable positions. The full subsidy is available for a new employee who is either:
A wage subsidy of up to $6,500 (GST inclusive) is available for businesses hiring a new employee who is either:
For more information, visit Australian Government Wage Subsidies.
To see the full list of funding and support programs currently being provided by the Australian Government visit Grants and Assistance Programs
What State Government grants can I access for small business?
At the State level, there are also government business grants available.
Business Growth Fund Program
The Business Growth Fund Program that provides targeted assistance for small and medium businesses that demonstrate high-growth and employment aspirations. It is designed to support fast growing businesses looking to employ staff, purchase specialised equipment and access services to support business growth. Grant applications may attract funding of up to $50,000 (excluding GST) with a co-contribution requirement of 25% – 50% of total project costs.
Examples of specialised equipment meeting the eligibility requirements include:
Examples of services that are eligible for attracting this grant include:
To see the full list of funding and support programs currently being provided by the Queensland Government visit Business Queensland Grants.
For further details about the Government business grants or advice on whether you are eligible, please contact the expert team at IMT Accountants & Advisors on 0400 755 855 or 0421 000 541. Click to see our full list of services.
Four Strategies For Managing Business Inventory
Business CoachingFour Strategies For Managing Business Inventory
In 2013, Walmart lost $3 billion due to poor inventory management and suffered frequent out of stock instances. Poor inventory management affects large businesses (like Walmart) and small ones alike. It is important to recognise the impact this could have on your bottom line and future growth.
So what can you do to prevent the same catastrophe happening to your business?
1. Make sure you hold as much stock than you need
While debt finance has been accessible and rates low in recent years, many businesses have been lulled into a false sense of security that they can take advantage of a “good deal” and save money by “bulk buying”. However, this kind of buying leads to disaster as your free cash flow dries up and interest rates start to rise.
Holding more stock than is needed is never a good idea. Excess stock is dead money and takes up space, potentially leading to higher rent costs. Excess stock also locks up your cash flow. As interest rates increase excess stock can become expensive to maintain.
No doubt you’ve heard of lean manufacturing and “just in time” ordering in the manufacturing environment. Lean manufacturing originated in the Japanese manufacturing industry to minimise waste. The aim is to have just enough stock for the production cycle at any point in time. This keeps cash requirements for maintaining stock levels low. Lean manufacturing may not always be as easily applied in other environments, such as stock imports or orders requiring a long lead time suppliers. However, wherever possible it you should think about applying it to your business.
Advisers and accountants often talk about your “stock turnover” in terms of your business operating cycle. Stock turnover is the number of times in a year your inventory is completely turned over. If say, your cost of goods sold is $300,000 and you hold $100,000 in stock, your turn rate is 3 times. From a business management perspective the higher the rate of stock turnover, the lower the amount that you have invested in inventories and the lower the risks for your business.
Business Queensland provides a handy stock turnover calculator to assist small businesses.
You will need to consider your buying patterns. You obviously need to have enough stock to meet customer demand. However, where possible, think about ways to order less inventory more frequently.
Although volume discounts and shipping costs can mean the price per unit may increase for smaller orders, take the time to compare this to the cost of holding a greater quantity of stock for longer than needed. There is the financing cost, warehouse storage space (rent costs), and opportunity cost - loss of ability to use your money elsewhere if it wasn’t tied up in stock.
An understanding of your sales patterns (that is, which items customers are buying, when and how often) is essential to inventory management. Consider using systems to track and analyse this data to assist with inventory management.
2. Better accessibility and visibility to your inventory
Make sure your stock is stored in an orderly manner and is accessible and visible when you need it. You don’t want to be in a situation where your inventory management system indicates you have items in stock but you can’t find them for your customers. You can’t sell stock you don’t know you have. Good organisation of your storage area will keep things in plain sight and at hand when needed.
Consider investing in good inventory tracking software or add-ons to your accounting system. This will help streamline your stocktake and help maintain up to date information about your stock holdings. There are many different stock management applications that can integrate to your point of sales and inventory management systems. Some of these are tailored to your industry and save even more time with establishment. IMT Accountants & Advisors provide business coaching services to help you select the best option for you and your business.
The high profile collapse of Dick Smith is a good example of poor stock arrangement. Dick Smith is reported to have held up to 12 years’ worth of batteries. Proper use of inventory management systems to track sales trends would have avoided situations like this.
3. Maximise the credits offered by suppliers
Supplier terms of trade are an important part of your buying strategy. Occasionally, suppliers offer generous credit terms that can serve as a low cost tool in funding your inventory.
As we transition towards a digital marketplace and eCommerce, small businesses might also find it easier to purchase goods direct online. This will generally mean that payment is required at the time of ordering (removing any benefits from extended payment terms). However, you may be able to source a better per unit price this way, provided you have the free cash flow to fund the purchases.
The traditional approach is to negotiate suitable trading terms with your “bricks and mortar” supplier. Matching your stock orders to the payment terms offered will help you maximise your cash flow. For example, if your suppliers offer 30 day terms, consider ordering only enough stock to cover 30 days sales.
Where possible, look at negotiating terms based on a set number of days “end of month”. This means stock will be payable a set number of days into the following month, irrespective of when it was ordered during the current month. Consider ordering inventory earlier in the month to maximise the number of days you have available to sell the goods before having to pay for them.
4. Take action before the “best before” date
Consider the saleable life of the product. Is there a risk that it will become obsolete or spoiled before you can sell it? Does it have any “use by” or “best before” date considerations. The more stock you hold the higher the risk that you may have to dispose of it before you can sell it.
Slow moving stock poses a problem for many business owners. While we all want to maximise the profit margin on our stock purchases, it is important to be proactive and discount the stock when it appears some items are moving slower than expected or that the market has moved onto a newer or different item.
A good understanding of your stock turnover and stock requirements will help you keep more free cash and clear out your storage areas. On the other hand, failing to implement thought out and proactive inventory management strategies is likely to cost you a lot more than you may realise.
Key takeaways
IMT Accountants & Advisors provide inventory management services for business clients. To see the list of services we provide visit: Our Services