How hard is stock working for your business?
Released On 18th Aug 2022
Youtube video link here.
It's important to have stock to meet customer requirements, and to get good margins for your business. However, it's also vital to understand
- how much it costs to hold stock
- the importance of stock turn (that's how quickly you sell your stock) and
- other Key Performance Indicators that will help you in your business.
What do we mean by each of those?
How much does it cost to hold stock?
Business owners will realise there's a cost of holding stock, but what are those costs?
Now most people think of rents, rates, equipment, repairs, utility bills etc. However, don't forget things like transportation, staff costs and financing. You have to look at the whole cost.
What is Stock Turn and how does it influence profits?
Stock turn is how quickly you move the stock, or how often.
Let's look at example.
Imagine you've got a widget that costs £100 and you mark it up 100%. You sell it for £200. You're making £100 gross profit.
If you move that stock once a month you have 12 monthly sales which will generate £1200 in gross profit. That's 12 times £100. But if you can turn it over more, say twice a month, then you'll double that to £2400.
Stock turn measures the average sales in a year. So in the first example above stock turn was 12, and 24 in the second.
Generally, the quicker you can sell your stock the more profit you make.
In this example, the same space was used to generate twice as much profit.
A new client has a lot of old stock filling their store room. They’re short of space. The haven’t got the space for new stock which is required for current projects. They think the old stock has been ‘bought and paid for’ and that there are no ongoing costs. However it’s affecting their business operations by taking up that space.
Other Key Performance Indicators (KPIs) to help you in your business
Returns Percentage
This is when you track returns by either value or number. Business is all about trends: knowing if things are going up or down.
If your Returns Percentage goes up, not only does it cost you to deal with the return, you have an unsatisfied customer that you may lose.
You’ve got to identify what’s happening. Is it quality, transportation, delivery?
This is a very good monitor of how you are performing before it reflects in your accounts.
Gross Profit Percentage
This KPI is a must for every business. Break it down into gross profit margin on each product, customer group or market. Businesses tend to have a single gross profit figure which can hide great and poor performing areas of your business.
It's key to know the make up of your gross profit margin. It’s often what stops companies growing when they reach £1m or £2m turnover. There’s often something which is costing them money and they don’t realise.
Lead Times
You’ve also got to think about lead times as well. And that’s particularly challenging with Brexit, Covid and the war in Ukraine.
How changing stock management helped one business improve their finances
Prospects often come to us for a business review when they’re under stress. In this case they were buying last year’s stock at bargain prices, but running out of space, struggling to pay wages, and the accounts were in a mess. They were considering taking on extra premises, and borrowing extra money. The office and warehouse were jam-packed. There was stock everywhere!
We came up with a plan:
- sell older products, e.g. on ebay (even if it doesn’t make much money) as well as pass other stock on through the trade at lower margins
- free up space at the existing premises so that they weren’t touching the stock more than necessary
- tidy up the accounts, put Xero in place, and a barcoded management system
Stock is more than just a physical problem. It’s a financial issue too.
A year later there were big changes:
- increased stock turn and more cash (they didn’t need to borrow, and could comfortably pay the wages)
- increased profits
- accounts were up-to-date and in good shape so they could plan ahead with more certainty
- they didn’t need any more space so no extra costs including staff
How did the business owner feel?
He felt a lot more in control. A lot better. He could make the right decisions in the business, and wasn’t so stressed. In fact he had more time for himself, and time to go to the gym.
What would have happened if they’d taken on new premises?
The businesses operating costs would have increased by 50%, including extra staff. It would also have taken much more of the owners time, time that he didn’t have.
What steps should business owners take to make more money out of stock?
It’s really about being efficient and clearing your head. Produce a plan and sort one issue at a time to declutter your mind. Make decisions about old stock and don’t let it sit there for years, getting in the way of your business.
- Understand your numbers. If you don’t, find someone you trust who can explain them in simple terms. Get a decent accounts system like our recommendation, Xero. Make sure it’s set up to give you the right information and KPIs you need to run your business.
- Analyse your KPIs such as increasing stock turn, gross profit and returns. Sell on your slow moving lines.
- Consider what overheads you’ve got and need, especially if you are making a step change. If you are going to take on new staff or premises, what will it cost? And what extra revenue will you bring in? It is enough to make the change worthwhile?
It’s all about maximising your resources. Whether that’s people, premises, stock, cash. Get control so *you* run the business, not the business run you.
If any of this is resonates with you, get in touch and we’ll set up a time to talk. Alternatively, you can book a Business & Xero Review for a fixed low fee.
