Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (44 page)
Since you probably don’t have the know-how or the equipment necessary to make a sign yourself, you will have to go to an outside manufacturer. Do not expect manufacturers to offer suggestions or point out any problems with your design if you have come up with one on your own. That’s not their job.
Before you head to the manufacturer with your design specifications, check your local zoning laws. You may find that the design you’ve come up with for your fried chicken restaurant—a 30-foot neon number in the shape of a chicken—isn’t allowed in your area. If you are moving into a shopping center, the developer may have additional regulations governing signage that can be used in the facility.
TIPKeep your business cards and letterhead current. If your area code changes, toss your old stationery and cards and have new ones printed. Use it as an excuse to call everyone on your prospect list and remind them what you can do for them.
Most entrepreneurs need professional assistance with signage since they do not have experience in this area. You probably will not know how big the letters should be to be visible from down the block, and you may not know which materials fare best in inclement weather. For this reason, you should visit a professional—either a designer or a sign fabricator. A good designer knows when fabricators are cutting corners and not using the material requested or doing a shoddy job. A designer will also be present at the time of installation to make sure the sign is properly installed.
The cost of a sign varies greatly depending on the materials, type of sign and whether it’s lighted. Buying directly from a fabricator can cost as little as $500, but you run the risk of not meeting zoning requirements. If you hire a designer, you’ll pay a design fee in addition to fabrication costs, but you have a better guarantee that the finished product will work for you.
chapter 19
STOCK ANSWERS
The Lowdown on Inventory
W
here would an apparel company be without clothing? An auto supply store without auto parts? A computer company without computers? Nowhere, of course. Understanding and managing your inventory is one of the most critical factors in business success.
here would an apparel company be without clothing? An auto supply store without auto parts? A computer company without computers? Nowhere, of course. Understanding and managing your inventory is one of the most critical factors in business success.
Yet many entrepreneurs fail to answer such basic questions as “What items are the winners and losers?” and “How often does inventory turn over?” Don’t make this mistake. Management education expert Ashok Rao believes that companies can increase their profitability 20 to 50 percent or more through careful inventory management.
TIPInventory control doesn’t just mean counting. Take physical control of your inventory, too. Lock it up or restrict access. Remember that inventory is money.
There is more to inventory control than simply buying new products. You have to know what to buy, when to buy it and how much to buy. You also need to track your inventory—whether manually or by computer—and use that knowledge to hone your purchasing process.
Startup entrepreneurs are at a disadvantage when it comes to inventory control, says Rao. “They may not have the right kinds of systems to manage their inventory. They don’t have the right kinds of skills for handling inventory. They don’t know how to go about actually maintaining their inventory, and they sometimes have to purchase in larger quantities than what they want or need.”
Maintaining Enough InventoryYour business’s basic stock should provide a reasonable assortment of products and should be big enough to cover the normal sales demands of your business. Since you won’t have actual sales and stocking figures from previous years to guide you during startup, you must project your first year’s sales based on your business plan.
When calculating basic stock, you must also factor in lead time—the length of time between reordering and receiving a product. For instance, if your lead time is four weeks and a particular product line sells 10 units a week, then you must reorder before the basic inventory level falls below 40 units. If you do not reorder until you actually need the stock, you’ll have to wait four weeks without the product.
“The secret of success
is to do the common
things uncommonly
well.”—JOHN D. ROCKEFELLER,
FOUNDER OF STANDARD OIL
Insufficient inventory means lost sales and costly, time-consuming back orders. Running out of raw materials or parts that are crucial to your production process means increased operating costs, too. Your employees will be getting paid to sit around because there’s no work for them to do; when the inventory does come in, they’ll be paid for working overtime to make up for lost production time. In some situations, you could even end up buying emergency inventory at high prices.
One way to protect yourself from such shortfalls is by building a safety margin into basic inventory figures. To figure out the right safety margin for your business, try to think of all the outside factors that could contribute to delays, such as suppliers who tend to be late or goods being shipped from overseas. Once you have been in business a while, you’ll have a better feel for delivery times and will find it fairly easy to calculate your safety margin.
Avoiding Excess InventoryAvoiding excess inventory is especially important for owners of companies with seasonal product lines, such as clothing, home accessories, and holiday and gift items. These products have a short “shelf life” and are hard to sell once they are no longer in fashion. Entrepreneurs who sell more timeless products, such as plumbing equipment, office supplies or auto products, have more leeway because it takes longer for these items to become obsolete.
ON WITH THE SHOWT
rade shows are the primary way for new businesses to find suppliers. All major suppliers in an industry display their products at seasonal trade shows, where retailers go to buy and look at new items.Although retailers buy from various sources year-round, trade shows are an important event in every store owner’s buying cycle. Most retailers attend at least one trade show per year. Smart buyers come prepared with a shopping list and a seasonal budget calculated either in dollar amounts or in quantities of various merchandise.Practically every major city hosts one or more trade shows relevant to specific retailers. You can contact your local chamber of commerce or convention and visitor’s bureau for upcoming shows in your city or state. Your industry’s trade publications should also list relevant trade shows.
No matter what your business, however, excess inventory should be avoided. It costs money in extra overhead, debt service on loans to purchase the excess inventory, additional personal property tax on unsold inventory and increased insurance costs. One merchandise consultant estimates that it costs the average retailer from 20 to 30 percent of the original inventory investment just to maintain it. Buying excess inventory also reduces your liquidity—something to be avoided. Consider the example of an auto supply retailer who finds himself with the opportunity to buy 1,000 gallons of antifreeze at a huge discount. If he buys the antifreeze and it turns out to be a mild winter, he’ll be sitting on 1,000 gallons of antifreeze. Even though he knows he can sell the antifreeze during the next cold winter, it’s still taking up space in his warehouse for an entire year—space that could be devoted to more profitable products.
TIPIn addition to counting inventory weekly, monthly or annually, some experts recommend checking a few items each day to see if your actual amount is the same as what you have in your records. This is a good way to troubleshoot and nip inventory problems in the bud.
When you find yourself with excess inventory, your natural reaction will probably be to reduce the price and sell it quickly. Although this solves the overstocking problem, it also reduces your return on investment. All your financial projections assume that you will receive the full price for your goods. If you slash your prices by 15 to 25 percent just to get rid of the excess inventory, you’re losing money you had counted on in your business plan.
Some novice entrepreneurs react to excess inventory by being overly cautious the next time they order stock. However, this puts you at risk of having an inventory shortage. To avoid accumulating excess inventory, set a realistic safety margin and order only what you’re sure you can sell.
Inventory and Cash FlowCash-flow problems are some of the most common difficulties small businesses encounter, and they are usually the first signs of serious financial trouble ahead. According to management education expert Ashok Rao, tying up money in inventory can severely damage a small company’s cash flow.
To control inventory effectively, prioritize your inventory needs. It might seem at first glance that the most expensive items in your inventory should receive the most attention. But in reality, less expensive items with higher turnover ratios have a greater effect on your business than more costly items. If you focus only on the high-dollar-value items, you run the risk of running out of the lower-priced products that contribute more to your bottom line.
Divide materials into groups A, B and C, depending on the dollar impact they have on the company (not their actual price). You can then stock more of the vital A items while keeping the B and C items at more manageable levels. This is known as the ABC approach.
“What we think determines
what happens to
us, so if we want to
change our lives, we
need to stretch our
minds.”—WAYNE DYER, SELF-HELP
ADVOCATE
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