Knowing the top ten reasons small businesses fail is crucial to avoiding these pitfalls. In this third post I’ll talk about inventory management, the key to generating revenues and avoiding cash crunches.
The tension with inventory management is threefold:
1. Good inventory management requires you must build enough products to be able to satisfy your customers demand for your products quickly. If you’re out of stock, that’s a lost sale and lost revenues. It also means a dissatisfied customer who will probably go to your competition. That dissatisfied customer will probably spread some negative press about your business too. Too much inventory and you run out of cash and have to discount products to sell them.
The key to good inventory management is forecasting your sales. Put together a sales forecast for at least three months or the longest time it takes you to create a finished product, whether you produce it or your sub contract the production.
2. Good inventory management requires you manage your cash position closely. Why? Because when you buy or build inventory, you’re sucking up cash. Cash is the offset to inventory. Remember, cash is the lifeblood for your business so you must watch your cash position like a hawk.
3. Inventory management is one of the top ten reasons businesses fail because often, the owners are too optimistic on what they expect to sell. When you build too much inventory, you often have to discount it to move it out of the warehouse or off the shelf. This hurts your gross margin in a big way. Remember? A 20% discount wipes out your profits. Don’t get caught in that trap!
The key to avoiding this top ten reason why small businesses fail is projecting cash by month. Estimate what you cash positions will be by month so you can cover three key areas of the business:
Cost of goods for the inventory,
Fixed overhead expenses for the business
Variable costs for the business.
That means, in addition to forecasting unit sales by item (which gives you revenues), you must estimate your fixed and variable expenses.
Fixed expenses are like your rent and insurance costs. Variable expenses includes accounting and bookkeeping fees, legal fees, utilities, phone, salaries and marketing expenses.
Here are some tips to good inventory management for a solopreneur or a small business owner. Keep the number of items in your product line small. Test to see what the market loves. Then build inventory in that.
Next, find a way to build inventory on demand if you can. We’ll be selling Don’t Panic T-shirts very soon. Cafepress.com enables you to send them a design and they’ll create the T-shirt and drop ship it for you. You won’t need a warehouse of lots of fixed expenses. You make money, they make money.
And that’s a beautiful thing. Now you know three of the top ten reasons small businesses fail: Lack of Experience, Insufficient Funding and Inventory Management. Stay tuned as we explore the other seven key reasons small businesses fail – so you can avoid all of them!