Think about a discretionary stock take
Friday, June 15, 2007/
My time is valuable, and so is yours. Just how much you are worth to your business can be sometimes lost in a complacency of “stock”. Let me explain…
I am frequently tempted to write something that on reflection seems to be nonsense, and so I change the subject. I am sure we all have a little bit of that in us, although I have it in big doses.
I get an idea and then I think it is stupid and dismiss it. Sometimes later, someone else comes up with the same idea and everyone thinks it is great. Well, today I decided to write something that might seem to be nonsense to others but because I think that it is so important, I will risk the “why are you writing about something that is so obvious?”.
So here goes.
It doesn’t matter what business you are in, whether it be manufacturing, retail or the service industry, a critical element is the speed of turn over. People in retail talk about stock turns, so let us use that as an example.
Sometime ago (I was only reminded today because I am cleaning up my office and archiving some old stuff) I worked with a group of retail outlets and they were all happy with their profit and sales. Sales had increased year-on-year for the last 10 years. I came across some documents called “financials” which, according to the members of the group, revealed the happy tidings of prosperity.
There seemed to be a lot of money tied up in stock. “No, our stock turns are great; four turns a year.” A little investigation indicated that this was so with a lot of the quicker moving stock, but a year or two earlier the group had done a deal with a major supplier. The supplier put in promotional shelves and state-of-the-art displays, which made everyone happy.
However, they did something else. They increased the number of products on the shelves from 40 to 160. Guess what? Of the extra 120 products, 70 had been on the shelves for more than 12 months, tying up enormous capital and resulting in the increase in stock. Stock turns were nothing like four a year.
Now, I can hear everyone in retail saying “we know all this and we know what our stock turn is”. That is great, but sometimes if you do some discrete analysis as I did with that group you might have a big surprise. Just don’t take your turnover for granted. Watch it every second of every day to make sure that stuff is not going to rot on your shelves and tying up capital that can be more profitably used.
However, that is only part of the story. Accountants, lawyers, engineers and architects, to mention a few in the service profession, believe that they don’t have to worry about stock turns. All they have to do is fill in time sheets and send the bill to the customer at the end of each month.
What they tend to overlook is that it is only possible to work so many hours a day, and if you want to increase your income you have to stay awake longer or increase your charge-out rate. There is a limit to both possibilities.
If they charged more per product, the quicker they shifted the product, the less dependent they would become on time and more dependent upon job or, if you like, file velocity. If they did a stock take of their files and calculated the unbilled value of those jobs and brought them to account in their balance sheet, they would suddenly see unrealised income.
If they then concentrated on bringing jobs to completion to unlock that unrealised income, the value of stock would go down and the money in their pockets would go up; customers would be happy because of the speed of result, the revenue would be greater than if time was the factor being billed, and the resources would be freed up to move on to new work.
So forgive me for stating the obvious; but whatever business you are in, dig deep and think in terms of stock on the shelves, and not just in general terms but in discrete terms.
For instance, not how many bars of soap are on your shelves but how many and for how long per brand type; not how many files a lawyer has, but look at their different departments to see whether some product lines are taking longer to complete than one would hope; not how many billable hours there are in an engineering job, but how long the jobs are taking and how much more revenue could be generated with an increase in the velocity of completion of the jobs.
Stock costs money, and the quicker it is shifted, the less capital is required and the more money there is for growing business. When you run out of stock, you can either buy more or use your resources to go and get more work and grow the business.
While everyone knows this, the fact is that I come across people who have forgotten – and it doesn’t hurt to have a reminder.
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