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Start-up Advice

How to Find Your Inventory Sweet Spot

Top tips on finding the right products for your target market.

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In a retail business, the potential for product comes with wise inventory purchases. The most astute pricing strategies won’t help if your inventory is wrong. Creatively shop, but don’t be distracted by all of the wonderful merchandise out there that doesn’t fill your customer’s cup, or your investment will most likely be unrecovered.

Related: Be Good at Being Wrong by Getting it Right Quickly

Buying inventory is easy; selecting the right things to fill your store’s shelves poses more of a challenge. You know what kind of retail operation you have and who your customers will be. Now how do you put together your merchandise portfolio?

Choose products that enhance your reputation. Your prices should reflect your image and your target market. This means that you should establish your price lines and price points before you buy. You must get the highest possible markup consistent with competition and customer price satisfaction. The better the buy, the higher the markup you can make.

Establishing your inventory

Here’s a simple procedure to follow to help you decide which merchandise you should offer and which you should not. If you’re dealing with electronics or clothing, you may wish to do your breakdown on the basis of brand names. If you’re organising a food business, simply list the food supplies you would have on hand the day you open.

Let’s use a motorcycle dealer to explain how this model would work:

  • Divide your inventory into broad classifications, such as R300,000 for motorcycle hard parts.
  • Divide each broad classification into sub-classifications—for example, engine parts, wheel parts, frame parts, transmission parts, dress-up parts, drive-line parts, and tune-up parts.
  • Allocate a certain percentage of your capital to each sub-classification—for example, 20 percent engine parts, 5 percent wheel parts, 5 percent frame parts, 5 percent transmission parts, 30 percent dress-up parts, 10 percent drive-line parts, and 25 percent tune-up parts.
  • Locate resources that will sell you the products you want to stock. For instance, read Hot Bike magazine, the Cycle World Buyer’s Guide, and Thunder Press newspaper. Get catalogs from online sources such as Custom Chrome, Motorcycle Superstore, and Drag Specialties.
  • Make sure each item purchased gives you the best possible markup and that the retail prices will fit the price lines you have set for your operation. The motorcycle store’s target markup is 50 percent on services, 40 percent on accessories and clothing, and 35 percent on hard parts.

You only have so much money to allocate for merchandise. The challenge is to achieve maximum sales from what you buy. By first determining how much of what you’re going to buy, you discipline yourself to be discriminating and to keep your buys in balance with your overall inventory needs.

Faced with an enthusiastic salesperson, an attractive deal, and a hunger to buy, you need all the will you can muster to remember your priorities. Keep your buying plan with you and stick to it.

Finding products

One way to find the products you want to sell is to work with a buying office. A resident buying office is composed of buyers in national or international market centers who shop the market daily to offer their member stores information and to choose and purchase items for them. Resident buying offices primarily provide advice and counsel. Their staffs also do actual buying for their members on a contract basis.

A buying office can be your eyes and ears and can help you evaluate resources, identify price fluctuations, and keep up with trends. A buying office has its own staff of domestic and foreign buyers and can invite your buyer to information clinics.

Most professional buyers are located in or around merchandise markets. Search online using business industry terms to see what merchandising services are available in your area for your type of business.

Related: How to Start with Absolutely Nothing but your Own Blood, Sweat, and Fears

Independent resident buyers usually deal with small retailers, providing few services other than the procurement of merchandise. The buyer can represent many manufacturers and gives the retailer the advantage of choosing from a large assortment of items without paying a fee. The commissioned buyers are considered merchandise brokers.

Finding suppliers

Many manufacturers sell their goods directly to retailers. When there’s no middleman or supplier involved, you can negotiate terms more easily. Most retailers buy from wholesalers. Some advantages of dealing with a warehouse include access to a wide assortment of items close to your business, reducing the number of sources you have to deal with, and the ability to purchase in smaller quantities rather than going directly to the manufacturer.

Some importers are excellent resources and connect you with manufacturers in foreign countries. However, buying inventory from suppliers is the cornerstone of many a successful retail business, so you need to know how to establish good supplier relationships.

As soon as you file your business name or take out a business license, suppliers will start approaching you for business. Ask for catalogs, brochures, business addresses, and who they bank with to avoid scams. Established suppliers cannot only be a great source of necessities but can also offer you insight into the market. They can help you interpret consumer demand, guide you in the operation of your business, and assist in solving problems.

Selling seasons

Most buying is done on a seasonal basis. There are certain items that sell throughout the year, and there are those that drive consumers into your store during a specific period of time.

For instance, winter means long sleeves, boots, coats, snow shovels, cold remedies, hot food, heaters, and cross-country skis, while summer sells bathing suits, air conditioners, sunscreen, cold drinks, barbecues, and pool supplies.

Factor these realities into your analysis of your store’s sales activity. How hot is a “hot” item? Is the interest a passing fad or a sustainable trend? Make sure you can obtain new items and promote them in time to profit, or the risk may be too great for being left with excessive stock you’ll have to mark down.

How do you decide how much is enough? A common ratio during normal demand periods is 3 to 1. That is, to reach a certain sales figure, you must have three times that amount in inventory. For example, it might take a R900,000 inventory in snowboards to generate R300,000 in sales in that category during a given month.

Other merchandise classifications have different ratios. In a furniture store, it might take R500,000 in inventory to generate R100,000 in sales—a 5:1 ratio. In fine jewelry, it could take R300,000 to generate R50,000—a 6:1 ratio.

Related: The Top Business Models For Your New Start-Up Business

A major retailing goal is to generate as much as possible in sales from the smallest possible inventory, but it’s dangerous to run out of merchandise customers want. Thus, keeping tabs on sales-to-stock ratios helps you know how much merchandise you should have on hand. Trade associations usually maintain the most up-to-date ratios to assist retailers with buying.

This article was originally posted here on Entrepreneur.com.

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

Company Posts

Register A Company In South Africa

With over 120 Start-up Services, Company Partners is the perfect Partner for Company, Tender and Contract compliance.

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Company Partners is the leading Company Registration Service Provider in South Africa, offering a One-Stop-Shop for all the Company Registration and Tender Compliance Documents.

With over 120 Start-up Services, Company Partners is the perfect Partner for Company, Tender and Contract compliance.

Established in 2006, Company Partners guarantees that the services they offer meet the standards of the best in the industry. Over 30 full-time Consultants offer services and standards of the highest quality.

Company Registration Benefits

Your Company Structure is the first consideration you need to make when you want to register a new Company at the CIPC. The preferred choice of a legal entity for most Businesses is a Pty Company.

Related: Business Model Design – Picking The Business Model That Works For You

Here’s why:

  1. You protect your personal life and assets from your business when you register a company. If one runs a business, it is necessary to operate in a safe legal structure where your business assets and risks are separated from your personal ones.
  2. You look more professional when you operate under a registered company name. If you want to obtain a large contract or a tender, it appears more professional to trade in a Pty Company capacity than in your own name.
  3. Most Suppliers and Government Departments require businesses to be registered as a Company to apply for their Tenders and Contracts.

How to Register a Company

Step 1: Complete and submit the easy online sign-up form here.

Step 2: Your dedicated Consultant will call you to assist you with any questions you may have.

Step 3: Email your ID and easy supported documents – which your Consultant will explain.

Step 4: Within a few days you will receive your brand new Company ready to use for Tenders and Contracts, via email. You can contact your Consultant at any time on a toll-free number.

Related: New Fund For Small Businesses To Be Developed

Need a Company fast? Perhaps consider a Shelf Company

Company Partners offer a variety of Shelf Company Options to suit your needs, including 2016- year Registration Number Shelf Companies. Within 24 hours after purchase, you will receive the registered Shelf Company.

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You can also make use of a Nedbank Business Bank Account that’s active for your Shelf Company.

Luckily, getting your own Shelf Company is easy in terms of compliance. All that’s required is that you are at least 18 years of age, an ID document / Passport and a South African Business Address.

Why use Company Partners to Register a Company?

Fast timeframes: Your Company will be registered fast and effectively online. Your documentation is set-up in less than 24 hours, after which CIPC will process it.

Simple requirements: The only requirement for Company Registration is an ID / Passport. Everything gets done online, so you can be based anywhere in South Africa or the World.

Dedicated Consultant: Your own dedicated professional Consultant takes care of the entire process – he or she is available on his / her email and also on a toll-free number.

Professional Service: With years of experience of representing our Clients in Government, the entire process runs smoothly over the Internet. No lost documents and no frustration.

Company Partners completes all necessary applications correctly and reviews all the paperwork for you. You simply have to wait for your company documents via e-mail, confirming when you may start trading using your registration detail.

Related: Beauty Of Failure: The Art Of Embracing Rejection

After Company Registration

Any new Business needs guidance to prepare for Tenders and Contracts. After Company Partners gets you registered for your Company, Company Partners can assist you through the entire Company start-up process (optional).

That means they will ensure you have everything you need for a Tender or Contract application like a new PTY Company, BEE, Tax Clearance, VAT Registration, Logo Design, Website, Business Plan, COID, Letter of Good Standing, NHBRC, Accounting, Payroll and more.

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Start-up Advice

Alan Knott-Craig Answers Your Questions On Money And Partners

From starting the right business, to managing business partners and finding your magic number, there is a secret to happiness.

Alan Knott-Craig

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If I get rich will I be happy? — JC Lately

Does money equal happiness? Mostly, yes. Research in the US shows that your happiness is proportionate to your earnings up until you earn $80 000 per annum. Thereafter, incremental income gains have a negligible effect on your happiness.

In other words: More money will make you happy as long as you’re poor. Once you break out of poverty and enter a comfortable middle-class existence, more money will not make you happier.

These are the top three for old folks:

  • I wish I’d spent more time with family.
  • I wish I’d taken more risks.
  • I wish I’d travelled more.

Therein lies the secret to happiness. Spend time with your family. Take risks. Travel.

But first, make money. Don’t do any of the above until you’re making enough money not be stressed about money.

Related: Your Questions Answered With Alan Knott-Craig

What is the magic number? — Mushti

The magic number is the amount of money you need to not worry about money ever again. If you don’t need toys like Ferraris, yachts and jets, the magic number is R130 million. Here’s the math: R130 million will earn R9,1 million in interest annually (assuming 7% interest). After tax that is R5,46 million.

Assuming you need 50% to maintain a good lifestyle, that leaves approximately R2,7 million for reinvestment, which is enough to keep your capital amount in touch with inflation for 50 years. The balance of R2,7 million (after tax) is for your living costs. In South Africa, R2,7 million will afford you a lifestyle that allows you to send your kids to a great school and university, to travel overseas a couple of times a year, and to live in a comfortable house.

Over time your living costs (and inflation) will eat into your capital amount. After 50 years you should be down to nil, assuming you earn zero other income in that time.

In 50 years, you will probably be dead. If you’re not dead, your kids will be able to support you (because they love you and they have a great university education).

I am the sole director of a company (the others still have full-time jobs and don’t want to be conflicted) and there is pro-rata shareholding based on our initial shareholder loans. However, I am putting in most of the hard work, together with one of the other actuaries. How best do I manage the director/shareholder dynamic? I obviously want to make as much progress as possible but there are times when I need the input from the others (and their responses aren’t always as quick as I would like). — Mike

If you have any perception of unfairness regarding effort/risk vs reward, deal with it NOW! You can’t do so later. The best approach is honesty. Call your partners together. Explain your thinking. Perhaps argue for 25% ‘sweat equity’ for yourself. Everyone dilutes accordingly. Ideally cut a deal whereby you have an option to pay back all their loans, plus interest, within six months, and you get 100% of equity (unless they quit their jobs and join full-time).

Equity dissent must be resolved long before the business makes money, otherwise it will never be resolved.

Related: Alan Knott-Craig’s Answers On Selling Internationally And Researching Your Idea

What do you think of WiFi in taxis?— Ntembeko

It’s a good idea, but not original. Before embarking on a start-up, you should survey the landscape for competitors. Just because there are none doesn’t mean no one has tried your idea.

It just means that everyone that tried has failed. You need to be 100% sure that you have some ‘edge’ that makes you different from everyone who came before you (and failed). Otherwise you will fail. What is your advantage that is different to everyone who came before?


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Start-up Advice

What You Need To Know About The Lean Start-up Model

The Lean Start-up philosophy was developed by Eric Ries, a Silicon Valley-based entrepreneur who also sat on venture capital advisory boards. He published The Lean Startup in 2011, igniting a movement around a new way of doing business.

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The model follows key precepts that include:

Taking untested products to market

The fact that too many start-ups begin with an idea for a product that they think people want, spending months (or even years) perfecting that product without ever testing it in the market with prospective customers.

When they fail to reach broad uptake from customers, it’s often because they never spoke to prospective customers and determined whether or not the product was interesting. The earlier you can determine customer feedback, the quicker you can adjust your model to suit market needs.

The ‘build-measure-learn’ feedback loop is a core component of lean start-up methodology

The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a start-up can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect.

Utilising an investigative development method called the ‘Five Whys’

This involves asking simple questions to study and solve problems across the business journey. When this process of measuring and learning is done correctly, it will be clear that a company is either moving the drivers of the business model or not. If not, it is a sign that it is time to pivot or make a structural course correction to test a new fundamental hypothesis about the product, strategy and engine of growth.

Lean isn’t only about spending less money

It’s also not only about failing fast and as cheaply as possible. It’s about putting a process in place, and following a methodology around product development that allows the business to course correct.

Progress in manufacturing is measured by the production of high quality goods

The unit of progress for lean start-ups is validated learning. This is a rigorous method for demonstrating progress when an entrepreneur is embedded in the soil of extreme uncertainty. Once entrepreneurs embrace validated learning, the development process can shrink substantially. When you focus on figuring the right thing to build — the thing customers want and will pay for, rather than an idea you think is good — you need not spend months waiting for a product beta launch to change the company’s direction. Instead, entrepreneurs can adapt their plans incrementally, inch by inch, minute by minute.

Source: theleanstartup.com

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