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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.

Entrepreneur

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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.

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Start-up Advice

Put On Your Wellies: It’s Time To Wade Into Risk

Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…

Chris Ogden

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You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.

Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.

It is also unrealistic to assume that it isn’t worth taking this risk.

There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…

Step 01: Do your research

No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.

Step 02: Understand the costs

Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.

A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.

Step 03: Know when to walk away

As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.

You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.

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Start-up Advice

Mind The Gap

The entrepreneur’s guide to finding the gaps and building the right solutions.

Chris Ogden

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Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.

Here are five…

1. Network

It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.

2. Look for pain

Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.

Be the Panado that fixes these pains.

3. Luck

luck

This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.

4. Luck needs courage

You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.

Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.

5. Pay attention

This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.

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Start-up Advice

5 Things To Know About Your “Toddler” Business

As you navigate this new toddler phase of your business, here are five things to bear in mind.

Catherine Black

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Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.

Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”

As you navigate this new toddler phase of your business, here are five things to bear in mind:

1. This too shall pass

Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.

2. Appreciate what this phase brings

The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.

3. Establish boundaries

Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.

4. Take a break

Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.

5. Give it space to make mistakes

While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.

During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.

While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.

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