How to Budget and Manage Inventory for 2011
If your suppliers can’t meet an increase in demand, neither can you. Here’s how to make sure you’re both ready for better times.
Be careful what you wish for.
If you’re like many small-business owners still struggling to survive in today’s tough economy, what you’re most hoping for in the New Year is an increase in demand. Fact is, however, should orders rise too quickly, you might find yourself in a different type of jam: an inability to come through with the goods, thanks to sparse inventory levels at your suppliers.
In fact, inventories are critically low nationwide. Most companies have an average of less than 29 days of inventory on-hand, an 11.5 percent drop from the year before. That’s the lowest level since 2003, according to a recent analysis of the 1,000 largest public companies in the U.S. by REL, a consulting firm that focuses on working capital performance.
The economy is the driving force of this predicament, of course. Suppliers simply can’t afford to keep a lot of inventory on their shelves. But that creates the potential for a difficult situation. “Inventory levels are at a point where you really need to worry about just how you’re going to meet an upturn in demand,’ says
Jerry Mills, CEO of B2B CFO, a provider of temporary CFOs located in
Mesa, Arizona.
If you’re projecting increased demand in 2011, your best chance of meeting it is by working closely with your key suppliers now. Here are steps to help you in that process.
Managing Inventory: Get a Backup
When possible, your first step is ensuring you have more than one supplier. Don’t go overboard, however. Two choices is best, advises
Ken Kaufman, CEO of CFOwise in
Pleasant Grove,
Utah. The reason: you will find it cumbersome to manage too many supplier relationships.
That said, having extra suppliers also allows you some bargaining room. Take
Linda Minde, co-owner of Tri-Lite Builders, a 29-year-old, four-employee
Chandler, Arizona, home remodeling company. Several years ago, according to Minde, during busy times, she had to wait as long as six weeks for fixtures and other parts. So Minde sat down with her key suppliers and had a talk, explaining that, while she valued their business, she knew of other companies able to get her supplies in two to three weeks. It worked. “They realized it would help them to help us,’ she says. “The more jobs we can do, the more products they can sell.’ Now, the same vendors usually keep a stock of certain often-used products on hand for Minde, to tide her over when demand spikes.
Managing Inventory: Think “Partner’
Certainly, her suppliers’ loyalty is also a result of Minde’s long relationship with them, as well as many years of paying bills on time and providing a steady, reliable source of business. In fact, with any important vendor, you need to make sure that “you become their favorite customer,’ says Kaufman. Your goal is to encourage vendors to see you as a partner and, as a result, keep you at the top of the list. You can accomplish that by not just paying bills on time, but also responding quickly to questions and being willing to agree to flexible terms. If there’s a problem, says Kaufman, “Don’t pick up the phone and scream. Ask how you can work together to solve the issue.’
Managing Inventory: Budget for Different Scenarios
Now back to those budget spreadsheets that need filling out. Your best bet is to create a minimum of three budgets: one with an aggressive forecast for sales increases; another using more conservative-assumptions; and a third with worst-case scenarios. That's something you should always do, of course. But, in an environment where the prognosis for demand is especially unclear, it's particularly important. Your top consideration should be the effect of increased costs on cash flow, a critical issue when demand increases, since your needs for working capital will also rise.
Managing Inventory: Final Thoughts
Budgeting season is the perfect time to scrutinize vendor relationships. Your suppliers are in all likelihood mapping out their expectations for the year and you can help them do so by providing your outlook. As a best practice, you should share your budget and the variety of scenarios you might face to see whether they can handle each level of demand.
“Ask them, if we're going to grow at this rate, will you be able to accommodate our needs,' says Ken Gaebler, a small-business specialist in
Chicago. “If they can't you're probably dealing with the wrong guys anyway.'
Many businesses have failed because they couldn't meet demand. There's no good reason to join those ranks if you plan ahead properly.
