Small Business Inventory – To Manage Or Not to Manage

What does small business inventory have to do with profitability?

Most small business owners are not inventory management experts and they shouldn’t be. Most of them possess some special skill or knowledge and build their business upon it. At the beginning, it is usually rather simple, even if they sell products – the range of products is small and it’s relatively easy to keep track of them.

But when things go well and their business grows both in size and complexity, problems emerge. And many of those problems will have to do with inventory.

Challenges with small business inventory
You see, most tasks having to do with management and control of a business can be performed relatively easily on a small scale. A program like QuickBooks can help you keep your books in good shape, especially if you hire a skilled and experienced bookkeeper.

But even good bookkeepers rarely have to deal with issues of setting up small business inventory, calculating margins, analyzing product mix, etc. At this point a small business has developed enough to need a higher level of skill: a part-time Controller.

Small business inventory control is absolutely crucial to long-term survival, not to mention profitability. I know many businesses who don’t even have the most basic information about their more complex products – their total cost. Sure, they know how much it costs to buy each component. But once their products get complex enough to require any assembly, that transparency is gone. If QuickBooks isn’t properly set up to track assembly items, their cost will not be known.

“Does that matter”, you may ask? Well, if you want to know your margins, yes, it does.

Small business inventory – margin basics
These days many small businesses struggle with their cashflow. They come to me and ask “why am I not making any money?” “Well, let’s see”, I say, and start looking at their financials.

It’s pretty easy to isolate problem areas with the expenses, the overhead, etc, but it will all mean nothing, if we don’t know the margins. The product margin is simply the price less the cost. If the cost isn’t known, we won’t know the margin. It’s very simple:

Sales less Cost of Sales = Margin
Margin less Expenses and Overhead = Net Profit

And as I said before, once a business starts selling more complex products, their costs are no longer known, if QuickBooks (or any other software a business may be using) isn’t set up to properly keep track of them.

Small business inventory – product mix
Even when you know your margins, do you know what they mean? Do you also look at the mix? ‘What is product mix?”, you may ask.

Well, imagine you have two products:

- Product A costs you $1.00 to make and sells for $2.00
- Product B costs you $1.00 to make and sells for $5.00

Which one is more important to you? It’s not as simple as it may seem. What if the demand for Product A is a 100 greater than demand for product B? What if you can sell a lot more of Product A than you will ever be able to sell of Product B?

If during an average month you can sell 100 Products A and 5 Products B, Product A is generating more margin:

Product A
Sales Price: $2.00
Cost of Sales: $1.00
Margin: $1
Qty sold: 500
Total Margin: $500

Product B
Sales Price: $5.00
Cost of Sales: $1.00
Margin: $4.00
Qty sold: 5
Total Margin: $20

Now things get more interesting. You may want to know a lot more – how much overhead is needed to generate that high margin? Is it even worth it? If it is, maybe you should focus much more of your energies and resources on Product B? Since these products are so diametrically different, maybe we should track their profitability even below the margin level?

Perhaps we need to allocate some of the expenses which can be directly attributed to them so we see their “contribution margin”? Without that information, how can we possibly make the right decisions?

And now imagine that you now have 50-1000 products, all with different margins and different sales levels…

Small business inventory – summing up
All those considerations cannot even be entertained until you know your product costs. You won’t be able to make any intelligent decisions about your inventory mix, advertising, personnel etc. until all this is easily calculated and monitored on a regular basis.

And remember – without accurate costs, your net profit cannot be accurate, either. That’s why I always say to my clients:

“Accurate financial information is power!”

How to Pick a Small Business Accounting Software Program

Picking the small business accounting software you will use for your business can be a big decision. Once you select a software program it can be very difficult and costly to switch systems later if you are unhappy with your selection. That is why it is a good idea to thoroughly review all of your options before making the decision for your small business.

Some of the key factors that should be reviewed when selecting a small business accounting software program for your small business are

  1. Cost
  2. Learning curve
  3. Input efficiency
  4. Reporting capabilities
  5. Flexibility

In more detail here is what you should be looking for in each of the above key factors

  1. Cost – Compare the costs all the various programs you are considering. Ensure to take into account if the program cost is a one time payment or an on going monthly fee. On going monthly fee programs can sometimes be very expensive if you need to pay the monthly fee for as long as you use the small business accounting software program. Cost is not the only factor though, weight the other features of the programs against their cost as it might make sense to pay a little more for an accounting software program that has more features, is easier to use or is just more flexible.
  2. Learning curve – Take into account how long it is going to take you to learn the system. If an accounting program will take days or weeks to learn there is significant cost to your business by selecting a small business accounting software program of that nature. There is a lot of value in having a system that can be learned quickly by yourself or future employees.
  3. Input efficiency – Take into account how long it will take to make journal entries and run reports. If with one accounting system you will be able to enter twice as many accounting entries per hour versus another program, definitely choose the program that is quicker to work with. The less time you spend entering your accounting transactions the more time you have to run your business and make more money.
  4. Reporting capabilities – One of the key differentiators between small business accounting software programs is the reporting features available within a given system. Reporting on your financial results is critical to managing your business that is why you need to make sure the program you purchase can easily deliver the reports you need. Many accounting programs have set reports that can not be modified. If you are considering a software system of this nature it is critical you ensure the standard reports can not be customized to include the information you want and need.
  5. Flexibility – Finally the fifth factor to consider when selecting a small business accounting software program is the flexibility of the program. Flexibility includes the ease at which the necessary information can be extracted from the system. It also includes how easy it is to make correcting entries or the ability to transfer the program from one computer to another. The last thing you want to have happen is have all of your accounting information locked into your small business accounting software program but not be able to access or modify it in the way you want.

When making your final decision on the small business accounting software you will choose you should weight how each option you are reviewing compares on all 5 of these factors and also determine which of the 5 factors is most important to your particular business and situation. Only you know what your small business accounting software program needs to be able to do. If you follow this process you will make a smart informed decision that will result in the selection of a small business accounting software program that is right for your business.

How Web 2.0 Technologies Can Help Small Businesses Connect with Customers

Web 2.0 technologies include a range of Internet-based tools that if used properly can aid your small business in reaching existing and potential customers, which can ultimately help grow your business. Web 2.0 technologies allow businesses to create, customize and organize content on the web, rather than just consuming existing content. Some of these technologies are blogs, podcasting, tags, social networking, RSS, instant messaging, wikis, AJAX and online and interactive video, among others. This article will provide you with insights into how to capitalize on using several of these Web 2.0 technologies to better reach your customers.

Blogs

Blogs are web posts or web logs that your business can create to inform potential and existing customers about your products or services. They help to build awareness for your company and provide a venue for receiving feedback from customers. Blogs are typically updated on a regular basis and they can include text, images, video and audio. They are frequently linked to other useful sources of information, such as your website. By supplying useful information to people who visit your blog, your company can become a trusted source of information, which helps build the credibility of your firm. Search engines such as Google like blogs that are regularly updated and have links. Regularly updating your blog and establishing links to it will help push your blog higher up in the search rankings, and it can also help move your website up in the rankings, if it’s linked to your blogs.

RSS

RSS stands for Really Simple Syndication. RSS feeds allow your organization to send news and information to your customers. It also allows managers to stay on top of information related to your business, since RSS feeds enable a business to receive customized, relevant content on a regular basis, from various websites. RSS can help position your company as a leading source of information. This could translate into more customers and business for your organization, since new customers frequently seek out companies that are leaders in their industry. And RSS feeds are a perfect resource for small businesses, because there’s no cost involved in establishing and maintaining them.

Tagging

Tagging enables web users to organize online information from many sources, such as websites, links, images, etc. A tag allows you to easily find information from different places on the Internet, whenever you need it. Tags can also help bring people to your blogs or website. In addition, tags allow people to share information online. You can utilize tools like del.icio.us to help tag URL’s with keywords related to your business. Tags can benefit small businesses by enabling them to access and utilize information more efficiently.

Podcasting

Postcasting enables businesses to create their own radio shows on the web. The user can download Podcasts automatically, so it’s easy for potential or existing customers to listen to your company’s broadcast. Podcasts allow a business to broadcast their message unfiltered to the customer. They enable a business to have a conversation with the listener, which helps to personalize the company. It’s also a great format for interviewing the CEO or leader of your company or an expert in your field of business. Podcasts can help enhance the image of your company among existing and potential customers.

Wikis

Wikis are websites that can be easily edited and updated by the users. They provide a great forum for people within and outside an organization to collaborate. This can also create problems for small businesses, since competitors, customers or anyone on the Internet can abuse or alter information on wikis. In order to avoid these types of problems, a small business might consider limiting access to their wiki or only allowing employees or managers access to editing information on a wiki. A wiki is good for documenting and sharing information, however a blog may be a better choice for developing ongoing dialogue between a company and its customers.

Online and Interactive Video

Many small businesses may not have the resources to run an advertising campaign on television. However, it won’t cost you anything to post your TV commercial or a video clip of a key person at your company being interviewed, on your website. If you have a clever or intriguing commercial or video, you also might consider posting it for free on YouTube or Google Video, which are sites that are visited by millions of people every day.

Another idea to consider is creating an interactive video host on your website. The way this works is that when someone lands on your site, a video clip of the CEO or spokesperson for your company would greet the visitor. To gain the maximum impact from this technology, consider shooting video of your host so they appear to be walking onto your computer screen when a visitor lands on the site and have the host appear to be talking directly to the website visitor. The interactive host might talk briefly about the benefits of doing business with your company and point out some of the highlights of your site. They might also talk about the benefits of a particular product your company sells.

Also consider creating and posting various video clips on your site that a visitor can interact with. This helps to involve the prospect with the contents of your site. Video clips on your site should be short, :30 to :60 or under, since consumers have a limited attention span and might end up leaving your site if the video is too long or boring.

Web 2.0 Technologies Can Help Grow your Business

By experimenting and adopting these Web 2.0 technologies, your company can gain a leadership position in your industry. These technologies can help your company to establish itself as an innovator that customers and prospects think of first for leading edge information. By staying on top of the latest Web 2.0 technologies you can take advantage of these web-based resources to help grow your business and customer base.