Retail businesses often have more cash tied up in stock than is necessary for the profitable running of the business. Either through poor or conservative management, a business can be carrying as much as thirty percent more stock than is necessary for operation.
Stock which is not profitable for the business is of little value. Profitability is best measured by gross margin return on investment. Any good point of sale software system will report on this by stock item.
While there can be exceptions to the rule of profitability of return, they are rare.
Retailers and retail employees can permit stock which is underperforming to remain on the shelves because:
- It fills a space on the shop floor.
- They cannot afford replacement stock.
- They do not know which stock is under performing.
- They have lost interest in the business.
Regardless of the reason, dead stock is, well, dead stock and of no real commercial value to the business. For the sake of the business, action is necessary.
If you really want to unlock cash tied up in the business you will take the following steps to identify and move this stock.
- Indentify the dead stock. Use your Point of Sale system to list items which have not sold in the last three or six months. Look carefully at this list and consider whether you want to carry these items any more.
- Get all of the underperforming stock together and run a sale. Price the items to move quickly.
- Display the items lined up on tables for a sale – nothing too attractive as this is a sale after all.
- Your pricing should take into account the shelf age of the stock and your margin. Do not start with the lowest price, start with room to further discount should the need arise.
- Start the sale with a plan. For example, decide how long you will run the sale and whether you will operate with a steeper discount for the last day or two of the sale.
- Get all your staff together and train them in the items for the sale.
- Give the sale a name and create signed which indicate this and the discount available. Do not make the signs too attractive.
- Track the success of the sale and note the amount of money you are freeing as this is the cash you have available to invest in new lines for the business – as long as the sale stock has already been paid for.
Another option would be to talk to the suppliers of the slow moving stock. Some suppliers may agree to you returning the under performing stock in return for a credit for other stock you could purchase from them. This sale or return approach sees them take responsibility for stock which has not performed in your business and would be considered by some as an indicator of a good supplier.
Regardless of the method you use, the key is to be easily able to identify under performing stock in your business so that you can convert it to cash for reinvestment in your business. This is good retail management at work.
You cannot live off stock but you can live off the cash generated from profits.