setting inventory levels in a business plan

idaho

I`m putting the final touches on my business plan and am down to filling out
the cash flow worksheet. I`m having a little trouble determing how much
inventory I should purchase month to month based on projected sales. My
average mark-up will be about 35%.

What I`ve done to get an estimate is take my estimated sales, multiplied by .
35 then subtracted that total from the estimated sales. Is this right?

robertj

It would be a good exercise to compare the cost of carrying the inventory vs the cost of loosing an order. This can yield some amazing points. If you only have one product - the potential effect is more pronounced toward loosing a customer than if you have to inventory several items.
As a good starting point - find out your your industry performs on inventory turns. It will give you an idea for your planning.
 robertj2007-7-2 23:47:27

idaho

I`m really trying to determine a baseline The time between order and delivery of new product is 24 to 48 hours in most cases so it will be very easy to run a very lean inventory.I assume you men advertising dollars when you asked about co-op dollars?  That isn`t available in my state with my products due to certain restrictions on the sale of alcohol.Thanks for your thoughts.

robertj

Idaho,
With such a short delivery time on orders - do you need any inventory?
The next factor might be order requirements (minimum $ order or minimum quantity)
Since I don`t know the specifics of the products (size, density, weight, etc)  - another factor to review is transportation costs. Again, if it costs more to get it shipped to you than the carrying costs - then higher inventory levels might be appropriate.

ethnicomm

With zero inventory, you could  make money on the transaction alone! The customer pays you right away, you ship within 7 days and you pay your supplier within 30 days! You have use of someone else`s money for 30-37 days. Depend on how big your orders are, a 30 day CD could put extra cash in your jeans.If you have multiple suppliers, you can further mitigate the supply risk.robertj`s point on freight is important - given that you are essentially shipping water which is heavy, you will lose a fair bit on freight.  I don`t think shrink will as much an issue as waste (broken bottles etc).

TheMarketersMechanic

Inventory management is one of the most critical aspects of making your small business a success. It is in this area where little things mean a lot. However there are few practical resources available on the subject.
I wrote a small e-book on the subject which may be of some help as it explains the relationship between sales, profit and inventory in very practical terms. You can go to my website and download it for free.
www.alexcochran.com.au</A> then click on the tab "Double your retail return"
Hope this is helpful

idaho

The concept is a pretty straightforward brick and mortar retail shop with
products purchased and delivered through a very traditional distribution
chain similar to that available to restaurants. The availability of most of the
product I will be stocking will allow me to carry less inventory than what
otherwise might be required but unfortunately I will need a signifigant
supply of daily stock to satisfy customer traffic.

What I`m struggling with at this time is zeroing in on my monthly purchases
to support my projected sales for the sake of presenting to banks/investors
for the needed start up capital.

Thanks for all the great advice, I really appreciate it.

TheMarketersMechanic

Craig
Thanks for the review of the e-book. I am currently working on the second in the series which is more along the lines of Idaho`s question.
It is about how to establish and manage an open to buy system.
In response to your question about the relationship between inventory and customer service you are spot on. The first rule of retail is to stay in stock. If you do not use this as rule one you might as well close the doors. It all then comes down to managing risk. Robert J hit on a good  "rule of thumb" compare the cost of paying overdraft interest on holding one unit more to the amount you lose on losing one sale. If the lost sale profit is greater than the interest charge err on the side of overstocking if the other way err on the side of understocking.
This of course has to be tempered with the "importance" of the product to your customer, your image or sales of related product.
This is where the real retail skill lies. Reading your market and adjusting your management style to suit.
Here is a question...
Is retailing an art or science???

idaho

Ok, another question. I have my cash flow worksheet just about finished up
but I`ve looked at a number of different standard formats for this form and
they all lack a category for sales tax and corporate tax. Is this something
that I should be leaving out at this stage or should I go ahead and include it.

Obviously they are cost that I will incur but I can`t figure out why they
wouldn`t
be on the standard forms. idaho2007-7-7 15:45:37

robertj

By corporate tax, I assume the income tax paid by the corporation. This item is part of your normal income statement. Typically the last line before Net Income. The net income number is one entry to the cash flow projection sheet.