Thursday, January 30, 2014

Don't Marry Your Inventory

Yes, you bought it. But not for the long term. Your inventory is more like a one-night stand. Love it and leave it. Love it and sell it. Love it and let it go.

Today I am kicking a lot of my inventory to the curb. The Just for Fun Sale starts at 9:30am. Products that I loved were not loved quite so much by my customers. That's okay. We marked them down and are going to find them all good homes.

Most of this stuff has been here less than 18 months, some less than a year, some came in just last fall. If I ordered a case of six of something and could only sell two during the busy holiday rush, those other four pieces left behind aren't going to sell without some help.

Before we got a POS system, I would hear the wedding bells of buyers telling me, "That's a must-have, Phil. We need to stock up on those." After the POS showed we only sold 1 of the 24 pieces on hand over the past two years, the wedding vows would be echoing, "But I love this item. It just needs time to sell." Or I would hear the classic toast of, "I can't afford to mark this down..."

Don't marry your inventory. Love it and let it go.

Makes it easier when you count your inventory, too. Missing a few items? Shoplifters got some goodies? Do the math. How much is missing? If your shrinkage is less than 1% of your sales, you're doing pretty darn good. Years ago the National Retail Federation stated that annual shrinkage is around 3%, with employee theft being the biggest part of that, followed by customer theft and employee errors (either at the cashwrap or at the receiving end).

You are going to be shoplifted. You are not immune to theft. Put in all the cameras and security measures you want. Won't stop it completely. Wal-Mart has cameras and other security measures and still about $500,000 goes missing per store. It is just the cost of doing business. If that cost is less than 1%, then you're doing things right. Don't lament the loss.

Inventory is a means to an end. Its sole purpose is to move out the door one way or another and find its long-term lover, so that you can replace it and move on. That lover is not you. You are just the go-between, the rebound guy, the pimp.

Don't marry your inventory. Go find it the love of its life - at whatever cost - and move on.

-Phil Wrzesinski

PS Your end game is to get the customers to love the product more than you love it. Plain and simple. The most profitable way is better merchandising. Give the product good exposure on the shelf, a sign, a spotlight, or whatever it takes to make the product shine. But if that doesn't work, dump it and move on. The sooner the better.

Friday, January 3, 2014

How Much Cash is Enough?

(Warning: This post includes math. If you wish to stick your head in the sand and stay away from all things math, do so now.)

This is a big question at the end of the year for pretty much all retailers, especially us seasonal retailers. We're flush with cash from the big Christmas season. We're thinking we want to give ourselves a nice bonus, possibly pay down a loan, or even bonus the employees who worked so hard.

We just want to make sure we have enough cash for the upcoming year. But how much cash is enough?

You need to calculate two numbers - Current Ratio and Cash-to-Current Liabilities Ratio.

To do that, you need a Balance Sheet from January 1st. Your accounting software can easily print that for you. (If you don't have any accounting software, take some of that cash and invest in Quickbooks and a class on how to use Quickbooks - it will pay for itself in one year!)

On your Balance Sheet locate these three numbers.

  • Current Assets
  • Cash
  • Current Liabilities

The Current Ratio is calculated like this:

Current Assets divided by Current Liabilities = Current Ratio

The answer will typically be shown as a number like 2.9. A good rule of thumb is to have a ratio of 1.5 or higher. Typically seasonal businesses at the end of their season will have a ratio around 3.0 or higher. If your number is around 3.0, that's pretty good.

The Cash-to-Current Liabilities Ratio is calculated like this:

Cash divided by Current Liabilities = Cash-to-Current Liabilities Ratio

The answer will typically be shown as a percentage like 75%. For some businesses you would ideally like between 10-20%. But for seasonal businesses entering their slower season, you will want much more, as much as 70-80%. If you are a seasonal fourth quarter business, 75% is a good number to have right now.

Separately, the two numbers only tell part of the story. The key is to look at both together. If both numbers look good, then your only real worry is deciding what to do with the extra cash. If both numbers are weak, then you have some tough decisions to make to try to raise some cash and get cash flow under control.

But when one is weak and the other strong, there are a number of issues at play.

If the Current Ratio is strong but the Cash-to-Current Liabilities is weak, then you likely have too much inventory. That may be on purpose because you got a good buy or are planning an expansion or are growing inventory for the upcoming season. Or it may be that you bought too much last year and are carrying excess inventory. It might be time to have a sale.

If your Current Ratio is weak but Cash-to-Current Liabilities is strong, you need to start writing orders and building up your inventory.

The math isn't that hard to do. The results, however, tell you a lot about the health of your business. Don't ever be afraid of the Math.

-Phil Wrzesinski

PS If you are a summer seasonal business go pull your Balance Sheet from the end of your season and do those calculations from there. If you are not a seasonal business (doing 40% or more of your annual business in one quarter), then you don't need the big build-up of cash so those numbers can be much lower. Just keep an eye on them each month.

Thursday, January 2, 2014

Top Ten Blogs from 2013

A lot of people thought these blogs were interesting enough to tell others about it. Just in case no one shared these with you, here are the top ten most shared blogs from 2013.

Are You Open-to-Buy? Inventory Management is one of the most difficult and costly things to do in retail. Do it right and your cash flow and profits soar. Do it wrong and no matter what else you got right, you're still out of business.

Sit in the Hot Seat for a Bit if You Want to Improve I made Ernie sit in the hot seat to find out how we could improve his business. We looked at each interaction, one-by-one, until we found the breakdown in customer service. Do the same for your business and you'll know what to focus on for 2014.

Two Types of Customers (and Other Generalities) Everyone likes to have things broken down into simple lists and digestible analogies. This post does that for you.

Everything I Possibly Can Simple message: The best retailers are the best because they keep learning new ways to be better.

Great Minds Discuss Ideas My shortest blog of the year - based on a great quote by Eleanor Roosevelt.

I Did Some Showrooming Showrooming is a big deal that is hurting brick & mortar retailers all over the country. The real problem isn't the smartphone or Amazon. The real problem is our own ability to close the sale.

I Tore Up My Office Yesterday If you want different results, you have to do something different. (I think this got a lot of love because everyone wanted to see my messy office.)

Peeing Before the Race The dog that does its business before the race will run the fastest. The business that does its business before the season will be the most successful.

Anatomy of a Staff Meetting - Play Value I'm on a crusade to make staff meetings more fun and memorable. Who's with me?

The Mortar Between Your Bricks Bricks are the products you sell. Mortar is everything else. You need good bricks to build a good business. You need strong mortar if you want that business to last.

May the lessons of 2013 bring you great successes in 2014!

-Phil Wrzesinski

PS If you want more, here are the Top Ten Blog Posts of 2012.