The Library for Owners
©copyright 1999-2017, The Retail Owners Institute®
by Patricia M. Johnson, CMC and Richard F. Outcalt, CMC
Is excess inventory threatening your store's survival? Here are 10 tips to turn your inventory into cash – quickly!
Sometimes retailing doesn’t quite turn out as you had planned. Did last year fail to live up to what you predicted—and budgeted for? Did you overestimate the popularity of your generous order of a particular product? Are there areas of your inventory brimming with overstock? Relax! There is a way out of this mess
If you find yourself long on inventory and short on profits—whether from overbuying, expanding lines too quickly, or overestimating sales, don’t panic.
You still can whip your inventory back into shape before it devours your profits. The key is to act quickly—the longer you keep excess inventory on hand, the more it will end up costing you.
If you think the only way to reduce your inventory is to run a sale or declare a buying embargo, guess again. There are less drastic ways to get your inventory under control again. Use a combination of the following 10 strategies to help you bring your inventory back to a more manageable level.
Look at every open order you have that you know hasn’t been shipped yet. Cancel or cut back on the orders that don’t presently represent a critical need. This doesn’t mean you should hack away at your orders with a cleaver. Instead, selectively cut out optional merchandise. Ask yourself if you can delay adding a new line for three or four months. Cut out marginal items. This isn’t the time to introduce a new product line.
Some of your suppliers may not let you cancel orders. Try explaining to them that by protecting your financial stability today, you’ll be better equipped to make future orders. Chances are, they’ll be more likely to make concessions if they think it will keep you as a stable customer.
Sometimes you can persuade a supplier to let you return merchandise you’ve already received. This option doesn’t come without some drawbacks, however. At the very least, you’ll get stuck paying the freight both ways, and you may not get full credit for the returned merchandise. But this is an option to consider if your condition is critical.
Do you have defective merchandise for which you haven’t yet requested return authorization? Get on the horn to those suppliers and ship it back! At the same time, check for substitutions you could have legitimately refused. You can get return authorization for substitutions more easily than you can for merchandise you’ve ordered.
Obviously, the quicker your merchandise hits the floor, the quicker it will move. Look for jams in your processing system that may be unnecessarily tying up merchandise. Work together with your staff to find ways to cut your processing time by 50 percent or more.
If you know a retailer in another community who can use some of your overstock, make him an offer. In order to make this work, you’ll have to offer him either quicker delivery than he can get from the supplier, a lower price or both. But if he pays you in cash, you’ll come out ahead.
One thing to remember: Make sure you sell outside of your trade area. If you sell to a nearby retailer, you’ll be trading wholesale sales for retail sales.
Your customers will naturally gravitate toward new merchandise. Take advantage of that tendency by pairing your older merchandise with your new arrivals. Price the older items near cost. Remember, the idea is to get cash quickly. With every dollar of markup, you move away from that goal.
Watch customer traffic patterns for a couple of days. If you find one section of your store being visited more frequently than another, do some rearranging. Shift your high-draw merchandise to another part of the store. Also, check your lighting and signage to make sure you haven’t created barriers to traffic flow with dark, foreboding corners.
Now is the time to give your salespeople strong incentives to sell both basic merchandise and add-on items. Set up a contest running two to four weeks. Offer prizes for categories such as: highest total sales, highest sales per hour, highest average sale, highest single sale, most items on a single sale, highest sales in one day, highest sales in one week and largest increase over the previous period. Above all, make the contests fun.
The time to do markdowns is just before the sales peak, not just after. All merchandise, particularly seasonal goods, will hit peak value just before hitting peak sales. If you’ve been slow with the markdown pencil, it may be slowing your turnover and tying up your cash.
How do you know when an item is about to peak? Past sales records will tell you, as will the wholesale market. When your suppliers start offering deals, it’s time to start cutting prices.
It’s still true that the first markdown should be the biggest. When you decide to discount an item, make it a good one. Anything less than a 30 percent discount barely stirs customers anymore. You may want to go straight to 40 percent, especially, if your cash needs are getting crucial.
Sometimes even drastic markdowns aren’t enough to move particularly stubborn merchandise. If you’re holding goods you’ve marked down two or three times without any action, give them to your favorite charity. You’ll save a lot of carrying costs, and you can take a full-value deduction on your next tax return. The tax savings will free cash for you to reinvest in new merchandise.
Once you have your inventory pared down, you’ll free more assets, increasing profitability. Think of it this way—better a dollar in your pocket than gathering dust as unsold merchandise.
These tips and strategies are great ways to keep your cash flow healthy and inventory investment manageable, especially during tough sales periods.