Easy Steps to Better Inventory Management

When my store, Hard Rock Developments Inc., in Calgary, Alberta, began selling products, I was under the impression that it would be a very simple process. Buy some products, do some simple math and put it on some used shelving. It will sell, I will make money and I will be rich.

The products certainly did sell, and everything seemed like it was all unfolding according to plan.

Then one day my accountant was at my office. He asked me, “How’s it going? Are you selling anything?” I was very jubilant and said, “Yes, of course we are.”

Then he asked me, “Yes but are you making any money?”

“Well, sure,” I said, wondering why he asked.

He gave me this really weird look and said, “If you keep this up you will not need my services next year.”

“Why?” I asked.

“Because you will not be here,” he replied.

That was absolutely the most defining moment in my career in the retail/wholesale environment. It changed my life.

The training had begun. I had to manage my inventory better.

He taught me how do to proper mark-up to achieve the proper gross margin.

He taught me how to manage inventory seasonally and really think about where my money is going.

Over time we were able to set up proper financing — lines of credit, loans and so on.

Finally, we built dashboards to ensure we are on track against our budget.  

It is astonishing how many business owners do not know the relationship between gross margin and mark-up. In my youth, I thought that if you take your cost, multiplied by 40 percent and added on the result, you will see your 40 percent gross margin. Oh boy was I ever wrong. No wonder I was going broke.

You need to know your landed cost. This includes brokerage fees, shipping costs, and possibly even exchange rates. Then you must mark it up properly. If you do not know how to do this, you had better find out today.

It is absolutely crucial that business owners understand this concept. It is very basic math, however rarely understood.

If you have been doing your mark-ups properly, you may have some cash in your bank. Or, you may have purchased too much inventory and all your cash is on your shelves. What are your inventory turns? You need to know this. Every industry carries a certain expectation of what your turns should be. You are in the retail/wholesale business, so you should be turning your inventory on a regular basis. The more turns per year, the better your cash flow.

As most small-business owners will attest to, proper financing is yet another key to running a successful business. You must be willing to risk some of your assets in order to secure additional funding from the bank. They will not risk their money if you are not willing to risk yours.

Use a line of credit for day-to-day activities, including payables, payroll and utilities. Term financing can and should only be used for equipment, upgrades to your store, marketing and such. Do not consume your line of credit with items that can be paid out over time.  

As a growing business, you will always need some form of financing. Be sure to use it properly.

Obtaining these forms of financing can be a challenge. Stick to what you’re good at, and get some help writing a proposal or business plan that will make the banker’s decision an easy one.

How do you manage all these aspects without having to sift through piles of paper and scour your accounting system for information on your cash flow, inventory dollars, daily sales reports, yearly comparisons, and so on?

Dashboards. Yes, just like in your vehicle. 

On top of a daily cash-flow report, your dashboard should be completed every two weeks. It should include YTD sales, inventory levels, a gross margin report, sales compared to last year, and any other pertinent information that will bring clarity to your business. I even include daily weather reports, so I can look back and see, perhaps, a reason why we have had low sales.

The dashboard should give you a quick overview of where you stand to date. If you are not doing one, how on earth do you know if you’re making any money?

Or, do you wait until year end to find out that your margins were too low or your inventory too high?

I incorporated all these aspects into my business many years ago, and since then, I have seen profits grow. We made it through the recession and still made money. Having these in place will allow you think clearly, come up with new ideas and grow your business.

In 2000, Brian Graham bought a company called Hard Rock Developments that built steel brackets for holding up concrete steps and sidewalks on new homes. He began selling decorative concrete supplies, rebar, concrete sealers and other goods. Today, Hard Rock Developments Inc. is a decorative concrete products store and showroom serving Calgary, Alberta. Reach Brian at hrdrock@telus.net.