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Archive for January, 2012

Inventory management: Inventory Obsolescence: What, why and how?

What is inventory obsolescence?

Inventory obsolescence is when the inventory is no longer salable / usable. Inventory obsolescence can happen for many reasons: changes in market conditions, regulations, changes in technology, fashion, over stocking or lack of demand.

Why inventory obsolescence important?

Highly levels of inventory obsolescence in a business can indicate poor inventory management, poor supply & demand forecast for products, and poor products to satisfy the demands of the customers/markets.

Inventory represents a most valuable assets of the business. The turnover of the inventory is the main source of income for a product based business and therefore inventory obsolecence can significantly contribute to poor sales performance of the business, its market share long term sustainability. Therefore inventory management is critical to the sucess of your business.

How to manage inventory & avoid obsolescence?

The best way to manage inventory obsolescence is to employ the best inventory management practices and align overall business objective. Keeping the right amount of inventory is critical in the inventory management process.

Inventory management involves, Keeping too much stock will cost the business storage, damages and obsolescence and under stocking will result in missed sales oppotunities, customer dissatisfaction and potential market share.

In order to best manage inventory and avoid obsolescence:

1. Analyse and understand your customers needs and wants and sales trends.

2. Build better relationships with suppliers and minimise lead times and improve business operations.

3. Regularly review the quantities of inventory in hand and stock valuation.

4. Review and analyse aging of the inventory and allow financial accounting provisions.

5. Regularly review and analyse the changes in the markets.

6. Regularly count your inventory (cycle count) and compare them to the inventory records.

Inventory management is critical part of your financial management and control and help improve performance, profitability and market share of your business.

Customer profitability analysis

What is customer profitability analysis (CPA)?

CPA is part of the business analysis and help businesses to measure the profit derived form each customer. It is the difference between the revenue generated from a customer and the costs associated with the customer in a given period.

What are the key benefits of CPA for business?

Understanding individual customer profitability can help you target high-value customers and tailor products and service offerings to their specific needs. A closer look at individual customers can help transform your bottom line. Knowing which customers add to your profitability is just as important to your bottom line as identifying those who do not. Some other benefits include:

  • Empower management to make decisions that boost profits.
  • Better prioritise customer service to attract and retain high-value customers.
  • Optimise marketing spend.
  • Improve retention and loyalty campaigns results.
  • Increase sales through personalised offers.

What are the key things to consider in measuring customer profitability?

Although it appears to be a straight forward process, it is quite important to start with clear definitions as to how to approach measuring customer profitability. It is important to identify the revenue associated with the customer, direct and indirect costs. The methods of measuring profitability has important implications on making marketing, pricing and servicing decisions and your bottom line.

Consider the following factors when starting implement CPA analysis in your business

  • Definition of customer unit. (Eg: Retail customer, Trade customer, On-line customers, store customers).
  • Existing or prospective customer. Profitability can be measured for both existing and prospective customers.
  • Determine whether the customer is an “Active” customer.
  • Allocation of variable costs.
  • Allocation of customer acquisition costs.

Using CPA business can identify, attract and retain it’s most valuable customers and improve their present and future bottom line. Incorporating customer profitability analysis in strategic planning can also offer insights into overall long term strength of your business.

Businesses can use this modeling to understand their customers and advise them on right products/services and help improve cusotmers’ bottom line and making CPA a win-win for all.

Financial management: Credit management

How well you are managing your debtors?

“A sale is not completed until the cash is collected”. Credit management is a critical part of financial management. Even highly profitable business could fail if they fail to manage their debtors as they can critically affect cash flow of the business.

Credit control is a key part of the financial management of your business. Establish proper credit contol procedures in your business.

How about a check list to help your credit management?

Use this check list establish a credit control system:

1. Ensure a control system in place to check and document credit worthiness of your customers. Credit checks can be done by asking for and checking trade references. You can also get a credit report for the customer online for a small fee.

2. Set credit limit for each customer depending on their business profile.

3. Regularly review each customers’ credit risk using the quality of credit reference check, how long they are doing business and their payment patterns.

4. Establish a procedure in the financial management credit control system as to how to handle situations when a customer reach their credit limit. Each person dealing with the customers in the business should be aware of the credit limit of the customers.

5. Establish payment terms and include them in each invoice to the customer. Ensure in your financial management, credit control system is sending out reminders and follow up regularly with the customers.

6. Ensure credit notes are processed for good returned on time to avoid disputes and delays in payments.

Few other things to consider….

Maintaining a good customer relationship is the key in managing credit situation of your business.It is a good practice to communicate with customers on a regular basis to understand their business and review the terms of trade and credit limit regularly (at least annually). It is also quite important to choose the right customer who you want to do business with.

Also set up key performance indicators (KPIs) for your credit management like DSO, age analysis of debtors and bad debt % and review them each month to take necessary actions.

By using proper financial management tools like credit control systems and KPIs to monitor them, you can better manage your customers, cash flow and therefore increase your business performance and profitability.

Variance analysis: Sales variance

Sales variance analysis is an important tool to manage and monitor the performance of the sales function of your business. It also used tool to analyse business results to better understand market conditions.

Sales variance analysis involve comparing the actual sales of a period to that of another or the actual sales to budgeted (planned) sales.

There are two reasons actual sales can vary from previous period sales: either the sales were at a different price from what was in the previous period (sales price variance), or the volume sold varied from previous period (sales volume variance). Both scenarios could also simultaneously contribute to the variance.

Sales price variance:

The sales price variance reveals the difference in total revenue caused by charging a different selling price from one period to another.

Price variance = (Price charged now – Price charged previously) x Qty sold this period

Sales volume variance:

The sales price variance reveals the difference in total revenue caused by changes in the quantities sold in different periods.

Volume variance = ( Qty sold in this period – Oty sold in previous period) x Price charged now

Using the variance analysis report, businesses can evaluate the financial risk to the company should those trends continue. Another is to address the reasons behind the significant variances identified in the variance analysis report.

A follow up to both of those steps may be to create new targets for performance improvement.

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