Turning Dead Inventory into Cash

September 22nd, 2015 by Doug Boswell No comments »

Dead InventoryMost small retailers struggle with dead inventory at some point. Slowly, gradually, almost imperceptively over time, the percentage of dead inventory grows. The problem is thought to be modest, because the rate of growth appears to be modest, so modest measures are taken to deal with it. An extra markdown here, a special promotion there, but still there seems to be more of it this month than there was last. Finally, when the sheer amount of inventory involved becomes inescapable, and the realization that the measures to deal with it aren’t close to being sufficient, the whole thing starts to feel overwhelming.

So if you’re looking at a buildup of dead inventory, here are a few ideas to help you get started turning it into cash.

1. Patience and persistence
You didn’t get into this situation overnight, and you’re not going to get out of it overnight (Unless, of course, getting 10 cents on the dollar from a jobber or liquidator makes sense to you, which it may in extreme cases). Build ups of dead inventory are frequently accompanied by a cash flow crunch, so the instinct to search for a quick fix can be strong. The solution, however, rests with a persistent, sustained effort designed to deliver consistent, incremental results. The first and most important step is establishing reasonable, attainable expectations for what can be accomplished in any given period of time.

2. Can you return it?
You never know until you ask. And if you ask firmly, and structure your request as a win/win proposition, most vendors will be reluctant to respond with a flat out “No.” What do you have that your vendor might find valuable in return for its help? Your next purchase order perhaps. A test order on that new item or program your vendor has been after you to try. Maybe an increased share of your business. Open the dialogue, show your vendor the inventory you’re sitting on, it might have outlets that it can sell it to. Make clear that your request is a one-time thing, not a new standard operating procedure. Maybe the best your vendor can do is offer markdown money, or an additional discount off your next purchase order. At a minimum, that would help with cash flow.

3. Segment your dead inventory

It is critical to recognize that dead inventory is made up of merchandise with dramatically different characteristics and market value. Break your dead inventory into three categories, which could be referred to as Still-Sellable, Not-Sellable, and everything else (or Who-Knows-If-It Might-Sell).

A. “Still-Sellable” is the most desirable inventory of the items you haven’t been able to move. It’s the most marketable, and appears to be the easiest to sell and turn into cash quickly. Start here. Break out a style or item, feature it, sign it, price it to move now, and get your cash. When that style sells through, break out the next style or item. If you’ve been struggling with tight cash flow, this will be your quick fix. Most importantly, if you can move this dead inventory you’ll feel like you’re finally making progress.

B. “Not-Sellable” is all the merchandise (aka, junk) you know no one is going to pay a cent for. When you see it mixed in with or merchandised near the “Still-Sellable” items, it makes that look like junk too. So get that junk off the sales floor, away from the rest of your dead inventory, and most importantly, away from your customers. The truth is that since these items have no market value, it doesn’t merit the time and effort necessary to try to sell it. Think about donating it to charity. The resulting tax deduction is one tangible benefit you will receive; another benefit is that the rest of your dead inventory won’t look quite so bad and will likely be more highly valued by your customers. In the end, if you can’t find a charitable organization that will take it, donate it to your dumpster.

C. “Who-Knows-If-It Might-Sell” is everything in between, and can be segmented yet again. After you sell through the “Still-Sellable” items, slice off the next most desirable layer of inventory from this category, feature it, sign it, and price it to move. Understand that each successive layer of inventory is likely to require a greater discount to stimulate customer response. As you go along, in fact, the least desirable inventory in this category will likely start to look and feel more and more like junk, which is a good sign that you’re near the end of the process.

4. Selling dead inventory is not like running a clearance sale

Dead inventory is different than clearance merchandise; it’s generally older and lacking in current demand. If you find a layer of dead merchandise that customers aren’t responding to, pull it back and bring something else forward, then bring the first layer back forward at a later time at a greater discount. If you attempt to move it merely by taking an additional markdown without remerchandising it, as you might with clearance merchandise, you only reinforce in the customer’s mind that it may not be desirable even at that new, lower price.

5. Develop merchandising and selling strategies to minimize the impact on your regular business

The last thing you want is for your store to look like it’s going out of business. You want to protect the brand integrity of your store. This is why a slow, steady approach works best, so that your dead inventory never represents more than a small piece of your overall offerings. For some retailers, it may be a small feature just off the front of the store, or perhaps a dedicated table or rack on a traffic aisle further back in the store.

6. Price it to be irresistible

Forget what you paid for it, or what you are carrying it on your books for. It’s not relevant. Let me repeat this, because it’s an easy point to get hung up on: Forget what you paid for it, it’s not relevant; that was then, this is now. What is relevant now is the price your customers will pay for it, now. And like most everything else in retail, your customers will tell you very quickly whether you have it priced right or not.

7. And then there’s eBay

EBay has emerged as a viable avenue for retailers to sell off dead inventory, but not everything necessarily lends itself to eBay. If you are sitting on highly identifiable, branded items with an established market position, even if those items appeal to a very specific customer, eBay may work for you. The typical eBay shopper is sophisticated and well informed. They are usually looking for something specific, down to a manufacturer’s stock number. They understand the value of what they are looking for so you have to be priced sharply. It’s an absolute must that you competitively shop similar items on eBay before you post your items there.

When you are confronted with a buildup of dead inventory, it’s critical to make a clear headed but realistic assessment of what it’s going to take to move it through. It’s losing market value every additional day it’s sitting there. It represents cash that is likely needed for other critical business purposes, such as paying vendors, reducing debt, and/or fleshing out assortments or stock levels of key items or categories. The time to get started is now.

Business Profit & Loss

June 26th, 2015 by Doug Boswell No comments »

Profit & Loss Dice

As a business owner you must continually focus on managing profit and loss to not only stay in business, but to grow and thrive. Profit is the money left over after paying all the expenses. A loss results from expenses exceeding the amount of sales a company makes in a specific period. Companies must manage their profit and loss statements, also known as income statements, to keep earnings positive, and expenses under control and in line with revenue.

Financial Assessment

Managing profit and loss begins with an assessment of your company’s current financial situation. Review the current profit and loss statement and compare it to the company’s last two or three years of historical data. An accountant can use this information to establish a set of performance benchmarks for the company’s average revenue and expense levels.

Analytical Tools

Have an accountant prepare analytical tools such as an income statement spreadsheet that shows every expense as a percentage of sales. This will allowing you to isolate costs that could contribute to decreasing profits. Perform this analysis for, ideally, three years of historical data. Expenses as a percent of revenue are compared for each year to reveal trends that show expenses raising or falling as a percent of sales over time. Some costs, such as the cost of goods sold, will rise with sales increases because they represent the raw materials and labor used to make the products you sell. Rent, administrative costs and some utility bills should remain the constant, regardless of increases in sales.

Explaining Expense Growth

Your accountant should perform additional analysis to investigate and explain the growth of expenses over time. This can reveal valuable information about the use of resources and their cost oversight. External factors such as the economy and rising prices also can contribute to cost increases. You need to find out which of these factors is involved in order to determine which might be controllable.

Sales Review

Next the accountant should review the company’s sales. Depending on various events and conditions, even when internal expenses have been well-managed and cut as low as possible, the company will still suffer a loss if its sales drop below its expenses in any given period. In this case, the company must make important decisions about how and why sales are generated, but may also need to consider discontinuing certain unprofitable product or service lines, selling off assets to free up capital and discontinuing investments in any projects that do not generate revenue.

 

Controlling Overhead Costs

May 22nd, 2015 by Doug Boswell No comments »

Overhead CostsThe cost of overhead can put your company in an uncompetitive situation due to the buildup of excessive expenses incurred in the running of your company. Without a breakdown of costs into production and overhead categories, you might not realize how much you’re actually spending on the operations side of running your company. Regular financial reporting and budget variance analyses will help to maintain the appropriate cost structure in a sustained fashion.

Overhead

The costs you incur to run your business and sell your product make up overhead. These are expenses you have even when you aren’t making your product. They include expenses such as rent, marketing, phones, insurance, administrative staff, office equipment, interest, office supplies, etc.

Identify All Overhead

The first step in determining your overhead is to identify it. If you don’t record every expense you have on a budget sheet or other financial report, do so. Start by creating production and overhead reports. Production expenses are costs that apply directly to making your product, such as materials and labor. Next, break down your overhead by function, such as marketing, human resources, information technology, office administration and sales.

Create a Purchasing Process

Assign one person to review and approve purchases so that they can see all expenses that are planned to be made before they are paid. Set policies for spending, such as requiring competitive bids for purchases over a certain dollar amount. Have your purchasing manager shop for better deals on common items you buy. Consider offering a bonus if your purchasing agent meets specific savings targets without sacrificing quality.

Review Contracts

If you outsource functions or sign leases, rebid your contracts annually, even if you end up using the same vendors and suppliers each year. Rebidding contracts prevents longtime contractors from inflating their fees, or encourages them to offer more services to keep your business. Frequently this will result in lower costs. A multi-year contract will usually favor the vendor. So, if you haven’t shopped your insurance in the past two years, do so, and discuss with your current provider how to reduce your premiums. Ask your utilities providers to visit your workplace to perform an audit and recommend how you can cut your monthly water, gas and electric bills. This annual process is a lot of work, but it sure pays off.

Improve your bookkeeping and accounting practices

From the start of the business, ensure that your accounting reports keep you aware of spending and revenue. This will help you analyze where you have over spent and where you can cut down on unnecessary expenditures. Well organized and up-to-date books have benefits beyond tax issues.

Technology will help improve productivity

There are many cloud-based tools now that will help your business save money, such as online invoicing, project management and others. Most vendors will offer a free trial period. The resulting efficiencies will reduce overhead costs.

Keep the head count constant

Efficiency is gained when revenue per employee grows. Technology, lean techniques, process engineering, etc. all are ways to free up time so employees can become more productive without having to add new headcount to grow. What if you could replace your lowest 10% of performers with new people that matched your top 10%? This would result in a huge productivity boost at virtually no incremental cost. There are a lot of techniques to improve productivity, but the point is that constantly growing headcount certainly will result in overhead growth that won’t necessarily result in profitable revenue growth.

Contemplate hiring freelancers or contract employees

There are certain functions in almost any business that can be outsourced to reduce the cost of space and other overhead. If you are hiring a full time employee, there are payroll expenses, health insurance and other costs that may be associated; this will slowly eat into profit.

Keep an eye on energy consumption

Switch off lights and other equipment when not in use. This might reduce energy consumption by 20%. If possible, use laptop computers instead of a standard desktops. Laptops consume approximately 80% less energy.

Reduce your phone bills

Use Skype, Google Chat or other chat services to get in touch with your employees or freelancers. You can also use web conferencing tools, such as GoToMeeting, to meet with clients online or make a presentation. It will significantly reduce your travel cost.

Ask vendors to own “their” inventory

Have vendors keep title to their inventory until sold. Normally inventory acquired from a vendor is held in your warehouse for use in manufacturing or resale to your customers. But why think of it as your inventory? It hasn’t been used yet so why can’t it still be their inventory? Best planning results in “just-in-time” delivery so there is no inventory. But this isn’t always possible, for instance, in industries like retail where a certain amount of inventory is necessary for your customers to by when they walk into your store. But again, why are you paying them and then sitting on their inventory? They need to own the inventory until time of sale.

A dollar gained in revenue is a very good thing assuming it leverages the current cost structure. But remember, only a small portion reaches earnings. A dollar saved from cost, however, goes directly to the bottom line. So while focusing on the top-line, don’t forget to engage in a systematic approach to controlling costs as a way to ensure long-term value creation.

Gross Profit, Profit Margin & Markup, OH MY!

April 27th, 2015 by Doug Boswell No comments »

Gross Profit, Margin & Markup

The terms Profit Margin and Markup are often used interchangeably to mean Gross Profit Margin, but they are not the same. A clear understanding and application of these concepts and calculations can provide the information you need to better impact your bottom line.

First of all, a very valuable calculation you’ll want to perform for understanding your business is Gross Profit, and then, the tool that you use to maintain gross profit, called Markup.

The gross profit on a product is:

Sales – Cost of Goods Sold = Gross Profit

To understand gross profit, it is important to know the difference between the expenses we call Cost of Goods Sold and the expenses we call Operational Costs.

Cost of Goods Sold are those expenses that are incurred as a direct result of producing the product. They tend to be variable costs such as:

  • Materials used
  • Labor directly involved in production
  • Sales commissions
  • Packaging
  • Freight
  • Utilities, or power costs, for production equipment and or facilities
  • Depreciation expense on production equipment
  • Machinery

Operational Costs are the more fixed costs such as:

  • Rent
  • Insurance
  • Professional fees
  • Office expenses such as supplies, utilities, a telephone for the office, etc.
  • Salaries and wages of office staff, salespeople, officers and owners
  • Payroll taxes and employee benefits
  • Advertising, promotion and other sales expenses
  • Auto expenses

While the gross profit is a dollar amount, the gross profit margin is expressed as a percentage (Gross Profit as a percent of Sales). It’s very important to track since this allows you to keep an eye on profitability trends. This is critical, because a business can get into financial trouble with an increasing gross profit that coincides with a decreasing gross profit margin.

The gross profit margin is computed as follows:

Gross Profit / Sales = Gross Profit Margin

There are two key ways for you to improve your gross margin. You can either increase your prices, or you can decrease the costs to produce your goods. Or both, if you can.

An increase in prices can cause sales to drop. If sales drop too far, you may not generate enough gross profit to cover operating expenses. Price increases require a very careful reading of inflationary rates, competitive factors, and basic supply and demand for the product you are producing.

The second method of increasing gross profit margin is to lower the variable costs to produce your product. This can be accomplished by decreasing material costs, or making the product more efficiently.

Volume discounts are a good way to reduce material costs. The more material you buy from a supplier, the more likely they are to offer you discounts.

Another way to reduce material costs is to find a less costly supplier. However, you might sacrifice quality if the goods purchased are not made as well.

Whether you are starting a manufacturing, wholesale, retail or service business, you should always be on the lookout for ways to deliver your product or service more efficiently.

And all the while, you also must balance efficiency and quality issues to ensure that they do not get out of balance.

Let’s look at the gross profit of Rapid Printing & Copy Company as an example of the computation of gross profit margin. In Year 1, the sales were $1 million and the gross profit was $250,000, resulting in a gross profit margin of 25 percent ($250,000/$1 million). In Year 2, sales were $1.5 million and the gross profit was $450,000, resulting in a gross profit margin of 30 percent ($450,000/$1.5 million).

It is apparent that Rapid Printing & Copy earned not only more gross profit dollars in Year 2, but also a higher gross profit margin. The company either raised prices, lowered variable material costs from suppliers or found a way to produce its print jobs more efficiently (which usually means fewer labor hours per product produced).

Rapid Printing & Copy did a better job in Year 2 of managing its markup on the products that they print.

Business owners sometimes get confused when relating markup to gross profit margin. They are related in that both computations deal with the same variables. The difference is that gross profit margin is figured as a percentage of the selling price, while markup is figured as a percentage of the seller’s cost.

Markup is computed as follows:

(Selling Price – Cost to Produce) / Cost to Produce = Markup Percentage

Let’s compute the markup for Rapid Printing & Copy Company for Year 1:

($1 million – $750,000) / $750,000 = 33.3%

Now, let’s compute markup for Year 2:

($1.5 million – $1.05 million) / $1.05 million = 42.9%

While computing markup for an entire year for a business is very simple, using this valuable markup tool daily to work up price quotes is more complicated. However, it is even more vital.

5 Ways to Avoid Tax Audits

March 19th, 2015 by Doug Boswell No comments »

Tax Audit 1When you’re self-employed filing a Schedule C with your tax return, your chances of being audited are greater than if you were a wage earner.

This is because the IRS catches many such individuals that attempt to either hide income or write off personal expenses as business deductions. When all you are reporting on your tax return is income from a W2, what’s there to audit? Even if you enter the numbers wrong, the IRS will match it up with the copy it got from your employer and send you a correction letter along with the adjustment. So, with scrutiny of the self-employed on the rise, here are 5 things you can do to reduce the chances of an audit:

1. Use professional software such as QuickBooks

Track the income and expenses of your business with accounting software. Your credibility increases in the eyes of an IRS agent if your tax return is based on professionally-prepared financial statements, especially if maintained by an outside firm.

2. Document sources of all income

If you are audited, the first thing the IRS agent will do is add up all of the deposits from your personal and business bank accounts. If more money went into the bank than was declared on your tax return, the agent will want to know where the money came from and whether or not the income is taxable. If you use QuickBooks for your personal and business books, you will automatically tie out this income, but you still need proof. If the income you record is not taxable (e.g. gifts, inheritances, loans, transfers from personal funds) keep a copy of the check or document that accompanies the income to prove the source is not taxable.

3. Let a professional prepare your income tax return

Self-prepared returns are more likely to be audited because the IRS thinks a nonprofessional has limited knowledge. Tax law is complex. And if you are self-employed, no matter how small your business, your tax return is now a complex creature.

4. Rethink your legal form

Corporations, LLCs, and partnerships are less likely to be audited, but that should not be the sole reason to incorporate. Discuss this option with a tax professional and your attorney before making any changes.

5. Document the Red Flags

You are allowed to deduct all ordinary and necessary business expenses which means thinking in terms of “Would I make this purchase if I didn’t have this business?” If the answer is no, than you more than likely have a deductible business expense. But it’s important to know the rules and to have proper documentation to substantiate the deduction.

Some expenses receive considerably more scrutiny than others:

Automobile expenses

Taxpayers are required to keep a mileage log if they want to take these kinds of deductions, which can be a lot of work. The IRS loves to investigate these because very few business owners will bother with this. Fortunately there are other ways to substantiate the deduction to the satisfaction of the auditor.

  • If you use an appointment book or calendar, save it along with your copy of the tax return. A mileage log can be reconstructed from those pages.
  • Save vehicle repair receipts as the odometer reading is recorded on them and total mileage for the year can be extrapolated if there is more than one receipt.
  • Record your beginning and ending odometer reading in your appointment book on Jan. 1 and again on Dec. 31.
Travel, meals and entertainment expenses

These are also very common when it comes to tax audit scrutiny. Go to www.irs.gov and read Publication 463 to determine what you can and can’t deduct.

  • Travel, especially to vacation destinations like Las Vegas or Hawaii should be documented with more than purchase receipts to prove the business intent. Save anything that can substantiate your claim that you were traveling primarily for business; such as flyers advertising the trade show, or the continuing education seminar, or letters from prospective clients at that location in your tax file.
  • Write the name of the person entertained and a brief note describing the business purpose on receipts for meals and entertainment.
Home office expenses

These are another red flag for the IRS to take a closer look at your expenses.

  • Take photographs of the house and the office area. The photos will serve two purposes: they will show the proportion of the business area compared to the personal living area to substantiate the amount of space claimed as well prove that there is in fact a business area.
  • Know the rules: The home office must be your principle place of business and must be used exclusively and on a regular basis for business purposes.