Cash flow problems are some of the most common difficulties
small businesses encounter, and they are usually the first signs of
serious financial trouble ahead. Tying money up in inventory can
severely damage a small company's cash flow.
To control inventory effectively, prioritize your inventory
needs. It might seem at first glance that the most expensive items
in your inventory should receive the most attention. But in
reality, less expensive items with higher turnover ratios have a
greater effect on your business than more costly items. If you
focus only on the high dollar-value items, you run the risk of
running out of the lower-priced products that actually contribute
more to your bottom line.
Divide materials into groups A, B and C depending on the dollar
impact they have on the company (not their actual price). You can
then stock more of the vital A items while keeping the B and C
items at more manageable levels. This is known as the ABC
approach.
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Often, as much as 80 percent of a company's revenues come
from only 20 percent of the products. Companies that respect this
"80-20 rule" concentrate their efforts on that key 20
percent of items. "It's a major mistake to try to manage
all products the same way," says Kay Roscoe Davis, a professor
of production management.
Once you understand which items are most important, you'll
be able to balance needs with costs, carrying only as much as you
need of a given item. It's also a good idea to lower your
inventory holding levels, keeping smaller quantities of an item in
inventory for a short time rather than keeping large amounts for a
long time. Consider ordering fewer items, but doing so more
often.
Excerpted from Start Your Own Business: The Only Start-Up
Book You'll Ever Need, by Rieva Lesonsky and the Staff of
Entrepreneur Magazine, © 1998 Entrepreneur Press