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Maximizing Your Working Capital by Keeping Inventory in Check

My seatmate on the flight to CEDIA EXPO was quite an interesting fellow.

Mike Detmer ([email protected]) is the principal of Detmer Business Solutions, which provides companies in the systems integration space with easy-to-use business knowhow modules that enable functional managers to better execute key duties. My seatmate on the flight to CEDIA EXPO was quite an interesting fellow. It was the first time that I’ve ever met a man who had been bitten by a rattlesnake, twice struck by lightning, and attacked by a shark and lived to talk about it on the Piers Morgan show. But also Erik is a successful businessman and our conversation soon turned from his personal adventures to business. When he asked, I explained that as a consultant I help companies improve their business practices to maximize revenues and profits. In the explanation, I cited an example where, employing my methodologies, my client was able to recognize and liquidate a quarter of a million dollars worth of excess inventory to generate the extra cash his business used to invest in a new product initiative.

Discussing excess inventory struck a chord with Erik, and he recited an experience of his own. Before his employees arrived for work one day, Erik taped a one-dollar bill to everything in his company that he considered wasteful. In the warehouse he marked discontinued items that were still in stock, in the marketing area he marked outdated brochures and price guides, in product development he marked competitive samples that were left to sit after evaluation, and so on.

When his staff arrived to work seeing one-dollar bills taped everywhere, a rumble began to rise, and by 10:00 a.m., Erik called a company-wide meeting to explain the method of his madness. “Now that I’ve finally got your attention,” Erik began. “Around the building are 500 one-dollar bills, each marking something that you should be converting to cash,” he told them. “What I’m expecting from you is, for every bill, give me a mitigation plan as to how you are going to convert the item it is attached to into something useful for the company.” Then he passed out a form he had prepared for the purpose and appointed his CFO to be lead on the project and track the progress.

Practicing inventory control is one of the best ways to maximize your profits. Needless to say, Erik’s exercise worked and his company was able to free up thousands from dead inventory that what would have just gone to waste. You can do the same. Here are a few tips to help you keep inventory in check to maximize your working capital:

1 Practice Inventory Avoidance

Choose vendors that can deliver what you need, just in time. If you must hold inventory for a job that is scheduled far out, ask your customer to cover the cost in a deposit and explain that this will ensure that he or she gets exactly the item/s on the job bid.

2 Assess Your Excess Inventory Exposure

Get in the habit of preparing a quarterly inventory report. In it list every item in stock and if it is due to be installed in a current job, is stocked because it is used frequently in most jobs, or is surplus meaning that it’s not scheduled to be sold and is not used on an ongoing basis. Keep track of the value of the total inventory and the percent to total that the excess accounts for, and make it a company priority to reduce the percentage of excess to inventory.

3 Get Rid Of What You Don’t Need

Many vendors offer exchange programs that allow you to return products with an off-setting order. Take advantage of these programs to swap out excess inventory for items you can sell in upcoming jobs. If the vendor won’t allow you to return your excess inventory, then ask them if it is OK for you to sell it on the internet, be sure to get written approval to do so, and comply with any dealer agreements you may have in place.

4 Integrate Inventory Control Into Your Culture

Let your employees know that keeping inventory levels to a minimum is a company priority and ask for their suggestions for how to keep inventory exposure low in your warehouse and on your installation vehicles. Explain that this initiative is intended to keep your business healthy and that it is a good thing for them too. Involve them in the quarterly inventory assessment and have a pizza party for the company every quarter that the excess inventory levels fall. You’ll be surprised at how your superstars will rise to the occasion.

Practicing inventory control is one of the best ways to maximize your profits because the cost of excess inventory comes right off of your bottom line. With a good strategy and systems in place, you can bolster your profits to invest in other areas of the business and make it grow.