You’re a retail business. You buy something at a specific price, then you sell it for a specific (hopefully higher) price. You might even add value, like turning raw materials into finished goods. Or maybe you simply rely on economies of scale for your sales margins, buying cheaper in bulk and selling singularly at a higher price. Of course, I’m talking about trading stock.
From a business point of view, a retail business may not want too much money tied up in trading stock. It’s risky if the products you sell spoil easily or become obsolete quickly. From a financial standpoint, stock levels can influence the decisions of business leaders and external investors due to the way business efficiency is measured. This is done by calculating inventory turnover, inventory days, wip days etc.
Without delving into the calculations, the (very simplified) premise is this… Trading stock is an asset. Assets are “things a business owns”. By keeping trading stock and assets LOW and generating sales revenue that is HIGH, you’re basically saying “Look how many sales we generated with so little resources! Our business is very efficient at generating sales and managing our inventory.” Directors, bankers and investors all like hearing these words.
However as a consumer I’m constantly disappointed by retailers who run out of stock. Here’s some of the most common excuses I’ve been served up over the years, starting with an old favourite…
“We don’t have that size.”
Whether it’s clothes, groceries, hardware or something else, retailers have a habit of running out of the most popular size or quantity item. I once had to buy a 10 litre pot of paint because there were no 3 litre pots left. It was mildly inconvenient, but not as annoying as being offered a size 14 shoe after asking for a 10. Maybe the lady serving me thought I’d grow into them?
“It was a sale item / catalogue item so we sold out really fast.”
They could’ve stocked up beforehand! You know, just in case there’s extra demand. If it’s a runout model or discontinued product line, then specify it in the advert.
“We can’t sell you that one, it’s a display model.”
I hate this one. Why even bother having it on display! To tell the next person that they can’t have one either?
In theory the goal is to have just enough stock. Retailers don’t want to overstock, but at the same time they don’t want to turn a customer away. This can be a difficult balance to strike in practice. Even if a retailer does run out of stock on a particular item, they’ve got you into their store. No doubt they’ll try selling you something else. We’ve all been disappointed by stock running out at some point. Next time it happens to you just remember, there could be a legitimate business reason behind it. CEO’s need their bonuses after all.
If you’re a small business trying to manage your inventory, Optima Partners can assist you in regaining control over your stock. (08) 6267 2200
And don’t ever let it get to this stage…
ANTONY MONALDI – SNR ACCOUNTANT