Friday, 30 March 2012

Is Business Growth Optional?

A significant proportion of owner-managers are averse to growing their business.  Often the reasons put forward are lifestyle choice, reluctance to employ more staff or fear that quality will suffer.

They of course have a choice – but here are some reasons why growth is necessary for an owner-managed business:

-         Sub-scale businesses suffer from “feast and famine”.  Even relatively modest wins can overload the organisation whilst a slight downturn in sales can be life-threatening

-         A resilient client base implies a large number of clients and the ability to replace them.  It is less risky to be bigger

-         Clients, particularly  big important clients, are intolerant of suppliers who are unable or unwilling to grow to meet their demands

-        There is a minimum size at which a business becomes self-sustaining; that is, where the organisation survives the loss of any individual or client and the capability to survive and thrive is proceduralised within the business processes

-         To be compelling for staff an organisation has to have a vision of something bigger than just the people involved.  They want to be on a meaningful journey that allows them to achieve their potential

-         An organisation has to adapt, evolve and learn in order to survive in a changing environment.   Whilst smaller organisations may be more agile they struggle to carry the overhead of this development capability

-        The bigger members of a species generally get the most food and their pick of mates.  Business is an ecosystem and, all other things being equal, smaller businesses lose out to larger ones as the latter improve margins through economies of scale and spend more on marketing, product development and so forth

-         Even if you have a unique advantage over your competition it is advisable to sell more, invest in developing that advantage and so exclude competition from that space - or risk losing the advantage.  In this way, a behaviour aimed at survival leads to growth

-         Research shows that survival rates improve with business size, particularly where this is combined with a wider range of products*

So growth may or may not be an end in itself but is a by-product of survival - and in turn makes businesses more likely to survive.  Being too small is not a sustainable position.

 *“When is more better? The impact of business scale and scope on long-term business survival, while controlling for profitability”, Bercovitz & Mitchell, 2007
To learn more, contact Nick Bettes via his website

Thursday, 8 March 2012

Why is it important to control the amount of stock you hold?

Why is it important to control the amount of stock you hold?

-         Holding stock is expensive.  You have to pay for the room to store it and you have money tied up in it that is not generating a return

-         Holding stock consumes cash.  If the value of stock you hold is growing then you are leaking cash from the business

-         Conversely, if you can reduce your stockholding (through sales rather than write-offs) then you inject cash into the business

-         Any stockholding is a buffer and so indicates an imperfect process
How can you limit the amount of stock you hold?

-         Limit the range of items you sell as far as possible within the constraints of your market proposition.  Ensure that specifying or purchasing anything else (“off-catalogue”) is subject to a higher level of control

-         Set up consignment stock arrangements (you hold the stock but only pay your supplier when you sell the item)

-         Incentivise or constrain your salespeople to sell slow-moving or obsolescent stock

-         Beware volume deals unless you are sure you can sell the stuff quickly

-         Ship older stock first – adopt a strict first-in-first-out approach

-         Avoid limited-life stock as far as possible within the constraints of your market proposition

-         Control purchasing so that only certain people are allowed to raise purchase orders, particularly where items are being purchased for direct supply or off-catalogue

-        Use an effective purchasing and inventory management system that allows you to monitor key ratios and drill into the detail if they drift

-         Make sure van stock or equivalent is included

-        Enforce stock receipt and issue controls and recording  even if you don’t have a special storeroom or a storekeeper.  Make effective stock control someone’s responsibility

-         Carry out a monthly stock-check and reconciliation – don’t leave it for a year
How do you know if you are holding the right amount of stock?

-         The right amount will vary by industry, company and time of year

-         You need to track the ratios that tell you that you have too little stock (stock-outs, delayed fulfilment or service, lost sales) as well as those that tell you that you have too much (slow-moving items, obsolete items, write-offs)

-         Stock turns (annual turnover/stock value) is a good top-level KPI