Ask any entrepreneur and they’ll tell you that cash is king! Cash is the lifeblood of any business. Without it, your business will die. It’s as simple as that. That’s why small (and large) businesses are highly sensitive to large swings in cash flow. Having a “slow month” can be devastating to a small business and if you don’t have tight systems in place to control spending, you could find yourself in BIG trouble. After payroll, inventory purchases often affect cash flow the most. It’s easy for spending to spiral out of control. How many times does your product manufacturer have new product launches? Is your business growing and suddenly you find yourself running out of product before the next inventory order? Do you have a big event coming up and you want to make sure that you have enough product to sell at the event? All of these scenarios affect cash flow. If you don’t have a system around inventory purchases and you purchase inventory by merely “eyeballing” what you need, that could very well be why you end up at the end of the month with no money left in your bank account.
Here’s a solid system and formula for making sure that you only order enough inventory to replenish what you’ve sold since your last order:
Run a sales summary report dating back to the last inventory purchase date. In our salons, we order retail inventory every two weeks, and professional products every two weeks. So, basically every other week we’re alternating between retail and professional inventory purchases. Keeping your inventory orders separate between retail and professional makes it easier to monitor your back bar costs as a percentage of service sales and your retail purchases as a percentage of retail sales.
After running your sales summary report, your budget for a retail order should be no more than 50-52% of the retail sales since your last order for a retail inventory order, or 5% of service sales if you are placing a professional (back bar) inventory order. For example, let’s say that in the last two weeks you sold $10,000 in retail. Your total budget when placing your next retail inventory order would be $5,000-$5,200 dollars. $10,000 (retail sales since last order) x .50 = $5,000. In our business, we target 50% of retail sales since the last retail order, and then we add employee personal product purchase requests on top of that. However some salon owners feel more comfortable setting their budget at 52%. If you are placing a professional (back bar) inventory order and your service sales since your last back bar order was $50,000, your budget for back bar would then be $2,500. $50,000 x .05 = $2,500.
To help expedite your inventory management, I recommend that you monitor your product average item movement. Most point of sale systems will provide a report that will give you this information. We run this report every three to six months and make adjustments to our minimum and maximum inventory levels. If our system says that we moved “xyz shampoo” 4 times every two weeks over the last three to six months, we make sure to keep double the amount on hand so we don’t run out. So, in this example, we would set our maximum at quantity 8. Practicing this exercise for your entire inventory helps you to monitor items that suddenly become hot or cold and thus allocating resources for adding stock or reducing stock on these items. Having your minimums and maximums set accurately allows you to automatically create an inventory order using the auto-create feature in your point of sale system. You should be able to order up to your maximum inventory levels with the push of a button. If you’re on top of your inventory, the purchase order amount should be very close to your budget that you’ve set using the formula above.
The formula is very simple, and yet I still find salon owners that continue to struggle to keep their inventory purchases under control. Give it a try. Use the simple formula above on your next couple of inventory orders and see what happens. Your business will thank you for it.