Journey of a Serial Entrepreneur

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How to get from where you are to where you want to be

5 Steps to Better Inventory Management

“Every company has metrics that track performance. The key question is whether these metrics really provide visibility to performance as viewed by the customer.” Steve Matthesen

Inventory management is an aspect of business which needs to be given more attention than what it currently receives. It is certainly not the most glamorous aspects of running a business. Inventory management is a basic business building block like marketing, sales or finance. Simply put, inventory management deals with how efficiently an organization manages it stock cycles. Stocks in inventory, relate to aspects of business that are exposed to risk when accumulated beyond certain thresholds. In the case of a service business, it is the amount of outstanding payments. Efficient inventory management helps a business to maximize its existing assets by increasing turnover. Listed below are five steps to assist your business in managing inventory cycles better:

1. Inventory Velocity: This is an essential metric, which measures the speed at which a business can move it’s stock. The speed at which a business moves it’s inventory will impact substantially on its profitability and ROI. Inventory velocity can be calculated by simply dividing the cost of goods sold by the average inventory for the period. This is a benchmark all businesses should watch very closely. To learn more about the importance of measuring inventory velocity please click here.

2. Forecasting: Mistakes made by forecasting incorrectly will impact directly on the level of inventory at the end of a financial period. There are three important aspects to be considered when constructing forecasts. The forecasts need to be based on data acquired from the market, sales channels and the current pipeline. Based on these aspects, we can construct forecasts for multiple scenarios which enable us to put measures in place, for the best and worst case scenarios. It is important to remember that forecasts are only as good as the assumptions they are based upon. To learn more about how to forecast revenue for your business please click here.

3. Communication Channels: When there are insufficient channels of communication between the producer, distributor, retailer and customer inventory, management becomes challenging. The information gap needs to be bridged by implementing several communication channels which include, allocated representatives, conference calls, real time stock levels and feedback channels. When information is allowed to flow freely from the customer to the producer, changes can be made faster and everyone in the chain stands to benefit. To learn more about the various communication channels please click here.

4. Technology: Organizations such as Walmart and Dell have shown the power of technology to optimize inventory management. Today, entrepreneurs have access to several tools such as bar coding, inventory management  and billing management software, which can help give small businesses an edge in managing their inventories optimally. To learn more about different types of technologies available for inventory management please click here.

5. Internal Policies: Policies and controls need to be selected carefully. Their main objective should be to facilitate bottom line growth for the business. These objectives act as guiding principles, and policies are intended to facilitate reaching those goals. Proper inventory management can impact bottom line figures and results for the business substantially. Policies pertaining to ordering, review and collections need to be mapped out in detail to ensure proper management of inventories. To learn more about internal policies relating to inventory management please click here.

Operations and supply chain management are the nuts and bolts of all businesses. Without smooth operations and proper controls, we could have a great website, killer marketing strategies and still come up short. When a customer does not get the product in time, or at the right price, we lose the customer. It all comes down to execution, and ensuring that we have systems in place to manage each order optimally. Inventory management is a critical aspect of this chain, and I recommend all business owners review their inventory cycles and work out ways to optimize them.

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Inventory Management Internal Policies

Policies are many, Principles are few, Policies will change, Principles never do. John C. Maxwell

A common answer I get when I ask individuals why they chose to become entrepreneurs is, “We did not want to get buried in bureaucracy and policies which stop us from performing optimally.” I completely understand where they are coming from. It is true that in some larger organizations policies and controls become so complex that it leads to much frustration. However, I do not advocate running a business without any control measures. Policies and controls need to be selected carefully. Their main objective should be to facilitate bottom line growth for the business. These objectives act as guiding principles, and policies are intended to facilitate reaching those goals. Proper inventory management can impact bottom line figures and results for the business substantially, and is an area where entrepreneurs need control measures to ensure that things move smoothly. Listed below are a few policies which may be helpful:

1. Ordering: If your business depends on manufacturers to produce your product, it is best you have documented your specifications in detail. It is also advisable to get quotes from a number of manufacturers before deciding to go with a particular vendor. This not only helps gather market information, it enables you to get the best price as well.

2. Inventory Review: I recommend setting up a policy to review inventory stock levels periodically. This helps determine current worth, idle stock alternative strategies to be offloaded can be discussed, and it provides management with a holistic view of the level of risk they are currently exposed to. For a service based business, this can identify customers not paying on time, and adjust their credit lines accordingly.

3. Collections: This is an area where entrepreneurs face a lot of challenges. If you have outstanding payments for products sold through retailers or for services rendered, it is essential that a mechanism is in place to receive this payments as soon as possible. I would recommend setting up periodic reminders through, email, phone calls and personal visits to speed up this process. Depending on your business model, having a collection policy which is adhered to closely, can increase short term liquidity substantially.

Inventory management is definitely not the most exciting aspects of business. It is however, a critical function which needs to be given a lot more focus. Through appropriate policies and control measures, we can achieve optimal inventory velocity and increase the likelihood of turning in even greater profit.

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Inventory Management Technologies

The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency. Bill Gates

Technology has played a massive role in optimizing inventory management. Examples of companies which stand out are, Walmart and Dell, they have used technology to make the most of their inventories and maximize velocity. Both these companies have used technologies such as RFID (Radio Frequency Identification), web based systems and software automation. Take Walmart for example, they track inventory levels throughout their stores continuously, and are able to transfer inventory from one geographical location to another, based on demand changes or how they use RFID to streamline pick-ups and deliveries from their warehouses. These represent massive infrastructure costs, which eventually lead to cost savings and efficiency. Most start-up companies will not be able to afford such systems. However, they do need to think of creative ways to use available technologies to optimize their own inventories.

Some ways to incorporate simple technologies into your business are:

1. Bar Coding: With specialty printers and software available quite reasonably, I recommend tagging your stock to keep track of movements. We implemented this in one of the companies I was consulting at, and it gave management a holistic view about stock levels and usage patterns. Using this information, they were able to make better inventory based decisions.

2. Inventory Software: These programs help keep track of key metrics regarding the usage of your inventory. They have the capability to provide future trends based on past usage, and can identify areas where the business is taking unnecessary exposure by ordering too much or too little. The fact that your stock inventory can be viewed holistically is a great benefit in itself.

3. Billing Management: For service based businesses, I strongly recommend using an invoicing and billing management software. These are critical to ensure that invoices are issued in time, and payments made accordingly. One can easily find metrics such as, how long your billing cycles are, and which customers need to be given stricter terms. Some tools have inbuilt email reminders, a very handy feature, to remind customers on a periodic basis. I find a lot of younger business owners take this function too lightly which can severely damage cash flows.

A constant aim should remain to increase inventory velocity. Technology provides us with a multitude of tools to help reach this goal. Some technology tools available, can unnecessarily complicate processes which can backfire. It is important to always keep simplicity and some specific goals in mind when integrating technology tools.

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Communication Channels

The single biggest problem in communication is the illusion that it has taken place. George Bernard Shaw

A major reason for inventory mismanagement is a lack of appropriate communication channels of information. When a producer has insufficient contact with the distributor, unrealistic expectations are formed. By the same token, if the distributor has insufficient communication channels with the retailers, there is also a massive information gap. To minimize surplus inventory stocks and form realistic expectations, all the parties involved need to play an active role to allow for real time feedback and communication. For example, a company I have invested in, distributes a particular type of spray paint can. It is a high end product, with many lower priced competitors. When we began a relationship with the producer, the producer’s expectation was to clear inventory at a certain speed. The ground realities however, were very different from what was expected, and it was primarily our fault for not doing sufficient research. This strained the relationship with the producer.

Eventually, we devised a model through which we began to clear the goods at a much faster pace, but it was not through the traditional retail model. When the producer came to visit our operations, he had very different expectation, and it took a lot of effort to clear communication channels. The lesson to learn from this example is, there have to be multiple communication channels for a business, to help them acheive their inventory turn targets. First the producer and the distributor must allocate an individual on each side to communicate the feedback received. There also needs to be periodic conference calls with management to talk about issues from a macro level, and to temper expectations and goals. Stock levels and pricing strategies should be constantly monitored. Next, if the distributor used multiple retailers, the same structure should be set up for communication between them. Lastly, constant customer feedback must be available through the web or surveys.

Creating a holistic model, where communication between all involved parties becomes transparent and fluid, will help fill the information gaps which are a result of faster inventory speeds. In my personal experience, it has not only created a stronger relationship with our principal, it has helped us tap into the potential of the product itself. This is done through constant feedback and strategies, which are developed when all the individuals involved work together to push the product harder. A lack of communication channels will result in stock piling of inventory, unhappy relationships and unrealistic expectations. It is therefore critical that communication channels be set up as soon as possible.

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Forecasting

Champions know that success is inevitable; that there is no such thing as failure, only feedback. They know that the best way to forecast the future is to create it.Michael J. Gelb

Forecasting and inventory management are intricately related. Any mistakes made by forecasting incorrectly will impact directly on the level of inventory at the end of a financial period. It is therefore critical that management spend time and effort in forecasting market demand as accurately as possible to avoid difficult situations in the future. Forecasting is a very tricky exercise, especially for entrepreneurs who are introducing new products or services into the market. Many a time this uncertainty is used as an excuse to overlook market data. I have been guilty of doing this a couple of times, and if you are running a product based business, the consequences can be quite severe. Listed below are a couple of pointers to help with the revenue forecasting exercise.

1. Market Data: Identify your target segment and the budgets for the problem your business is planning to solve. How is your competition addressing the problem at hand currently? Is there a high switching cost in the industry? At what rate is the target industry growing? How have embedded competitors innovated to get ahead of the competition? Can you find your competitors revenue statistics? What are the industry operating margins?

2. Sales Channels: How will your product/service be marketed and sold to customers? How many sales representatives are going to be allocated? What are individual targets set for each representative? How will each representative be compensated? Do any of the available sales channels vary cyclically?

3. Pipeline Management: How are leads collected and passed to sales representatives? How many collection points does your business have? How many leads can be managed per representative in the pipeline? How long does it take to convert a prospect to a customer? What is the average value of a prospect in the pipeline?

4. Scenario Planning: When creating forecasts it is best to come up with multiple scenarios. This helps develop strategies to manage the best case situation, the expected situation, and the worst case situation. These scenarios take into account certain uncertainties and help devise strategies for measures to be taken half way through the year when things take an abrupt turn.

Collecting this data can be an extremely challenging task. Be careful of information sources used. Forecasts are only as good as the assumptions which they are based on at the end of the day. A tip I use personally is to start looking for very specific statistics before I dive into the research. Lets say I want to know what the total revenue for our target industry is in Asia Pacific during 2007. This helps me narrow my search queries and focuses my attention to relevant information sources. No matter how challenging this process may be, it is far better than making some fatal errors in the future.

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Inventory Velocity

“Inventory velocity is one of a handful of key performance measures we watch very closely. It focuses us on working with our suppliers to keep reducing inventory and increasing speed.” Michael Dell

To understand the importance of inventory management with clarity, we have to understand a key metric, inventory velocity. Simply stated, inventory velocity is the speed at which a business can move it’s stock. The speed at which a business moves it’s inventory will impact substantially on its profitability and ROI. Whenever the subject of inventory velocity is brought up, the example of Dell is almost certain to arise. Dell revolutionized the personal computer industry with it’s direct sales model. Michael Dell understood that in an industry where margins are low, and inventory depreciates rapidly, the only way to be highly profitable is the ability to improve inventory cycles faster. His business model hence eradicated the need for holding inventory to the absolute minimum, resulting in Dell becoming an industry leader.

Inventory velocity can be calculated by simply dividing the cost of goods sold by the average inventory for the period. This is a benchmark all businesses should watch very closely. When your inventory velocity is low as compared to your peers, this is definitely a red flag which management should take very seriously. Having excess inventory left over, poses a major risk to any business. The inventory experiences depreciation, holding cost and reduction in the price of the product. In my experience getting rid of old inventory in the market place is a very challenging task. Therefore I recommend most businesses to have internal policies to deal with inventory which has not been moved a particular period of time say 12 months. These should either be disposed of or sold at whatever price the market will offer.

The concept of inventory velocity can also be applied in some cases to the services sector. For example, if you are running a consulting practice and bill your clients by the number of hours. The number of hours that are left outstanding at the end of a certain period of time, is your inventory. Inability to turn around your inventory quickly will result in massive cashflow gluts which can severly harm business operations. Lets say that one calculates on average the business settles outstanding balances in 90 days. What do you have to do to reduce the average to say 60 days? How will be the impact of the available cash flow? We have to think of ways to optimize our business operations continuously. As a younger company, this is always a challenge as larger companies take advantage of their clout. However keep track vigilantly of this key metric, and work on increasing it.

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5 Steps to Assess a Business

“Strategy is not just a plan, not just an idea; it is a way of life for a company. Strategy doesn’t just position a firm in its external landscape; it defines what a firm will be.” Cynthia A. Montgomery

As a business owner one needs to continually assess one’s own company as well as those of the competition. It is essential to have the ability to look at the larger picture and see what is working, and what is not. If you are younger start-up company looking to raise money, or attract potential team members, you need to have well thought out answers to key questions which will be asked. Listed below are five key questions which I believe every business owner must be able to answer.

1. Why does your organization exist?: To answer this question, one needs to have clear understanding of the problem the organization is wanting to solve and how it plans to do that. The answer needs an opening sentence which has the ability to get the other person interested instantly, and wanting to know more about the business. To read more about answering this question please click here.

2. What is your competitive edge?: This question requires you to identify three main components, customer needs, competitor capabilities and your own organizational capabilities. This will help to clearly identify the space your organization is going to be operating in, and your customer value proposition. To read more about the answering this question please click here.

3. What is your business model?: In essence this question is asking how your business makes money. The answer to this question requires you to clearly pin point your target market, financial estimates, scalability and originality. All assumptions and forecasts used in the answer must be based on extensive research. Investors see far too many hockey stick projections, without substantial evidence of how and why demand will pick up to reach those estimates. To read more about answering this question please click here.

4. How do you acquire customers?: The answer to this question is all about your marketing strategy.  Clearly outline metrics used to measure performance, market positioning and price point strategies. These objectives and strategies need to be translated into executable tactics through your promotional campaigns. Avoid using generic answers when answering this question and focus on key metrics you  want to achieve, and how. To read more about answering this question please click here.

5. Who is on your team?: This question requires you to tell the assessor the business plans for execution. The answer to this question is I believe, by far the most important aspect of assessing a business. One needs to mention the teams past experience, achievements, leadership examples and responsibilities. Highlight strengths and how they will be used to help reach your target goals. To read more about answering this question please click here.

One needs to have the answers to these questions, always prepared. They require much initial hard work and research,  the benefits however, far outweigh the time spent on them. One needs to remember to be clear, concise and confident when answering these question. It is all about passion for the business and the industry one operates in. This passion must be conveyed when talking about one’s organization. In the end if the story makes sense, numbers are fairly correct and you have managed to assemble a talented team, success is closer than you think.

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Who is on your team?

“The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don’t play together, the club won’t be worth a dime.” Babe Ruth

The success of any startup depends on the quality of the team executing the plans. It comes down to having a team who complements each others strengths and weaknesses, has the ability to work cohesively together and most importantly, has the same core beliefs and values. To communicate this to a potential investor or assessor of the business, requires a deep understanding of oneself and one’s team mates. A clear segmentation of the roles each person will be playing and why that particular person has been chosen for that role is essential.

The answer to this question should include reference to the following:

1. Experience: The first things which needs to be established is the team’s past experience and achievements. This will assist an understanding of where they are coming from and whether they have the required understanding of the market and skill set they will be responsible for. Wherever possible, support your answer with specific details including return on investments (ROI), market share growth, sales figure or any industry rewards and recognition achieved. Past tangible results need to be highlighted.

2. Leadership: This point needs to be stressed to showcase  possession of the necessary skills to lead and motivate a team. Highlight experience, responsibility and motivational skills from the past. Forward looking investors need to know whether an individual has the ability to motivate a team during hard times, and push them further when things are going well.

3. Roles & Responsibilities: From the very beginning there should be clear allocation of responsibilities. Even though at the beginning everyone has to wear multiple hats, it is important that they are responsible for the part of the business where their strongest skill set is used.

The points mentioned above highlight some key areas to develop answers around. Ultimately, investors invest in teams, not business ideas. Use this opportunity to promote your team as much as possible. Be clear, concise and focus on results and tangible evidence of the team’s great ability to work well together.

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Steps to create a winning team

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How do you acquire customers?

“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.” Jack Welch

The reason I ask this question is to understand how the business plans to market itself to its target segment. As mentioned earlier in my blog posts, very often start-up companies fail to sufficiently develop a well thought out, go-to-market strategy. Relying solely on a website, brochures and short run publicity tactics is not advisable. The assessor needs to understand explicitly what the marketing objectives are and what strategies they will use to reach those targets. To correctly answer this question, develop a marketing plan for the business which will help create a concise answer summarizing your goals.

The following information needs to be included in your answer.

1. Metrics: The answer to this question must be supported by  key metrics which will benchmark marketing strategies. Potential investors are looking for specific details such as market share figures, customer acquisition costs, customer lifetime value, customers required to break-even, and quarterly targets. These metrics must be established early in the answer to give it greater credibility.

2. Positioning: Next, establish positioning and the reason why that particular stance was chosen. Being specific about your target segment and clear on positioning is essential for any marketing plan to work effectively. Choosing a generic target segment like SME’s may appear appealing, however, most do not have the resources to tackle such a large target segment on their own.

3. Price Points: It is always good to know the rationale why a particular price point was used in the strategy. Setting correct price points requires a lot of data collection in the form of surveys, feedback and industry reports to establish credible and  optimal price points. Setting it above or below industry norms must be done with adequate reasons and supported by marketing tactics.

4. Promotional Tactics: After clearly establishing your objectives, positioning, and price points, it is essential to explain how they will be achieved. This relies on the promotional activities a business uses to reach its target segment.  Consistency in promotional tactics is a critical component to establish .

The ultimate objective when answering this question, is to come across as someone with deep knowledge about the industry they operate in, and a clear picture of how they are going to carve out a niche for themselves. The points listed above should serve as guiding points to help you formulate an answer which will help establish this.

Related Articles:

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What is your business model?

“Great companies first build a culture of discipline…and create a business model that fits squarely in the intersection of three circles: what they can be best in the world at, a deep understanding of their economic engine, and the core values they hold with deep passion.” Jim Collins

In essence what this question is asking is, how does your business make money? To answer this question you must explain comprehensively how the different functions of your business fit together to make a profit. A good business model must satisfy two very simple core criterions, it must be based on it’s target market demand and must make financial sense. As simple as these two criterions may seem, many businesses, specifically in the “internet” era fail to pay attention to them.

One example is that of Webvan. They wanted to take grocery shopping, online. Great idea, huge demand from customers, however, it failed the financial test. The numbers did not add up and after spending hundreds of millions of dollars, the company was forced to close down. Another example of where the story did not make sense, is a company called Flooz. It wanted to convert real money to virtual currency to be used for spending online. After $35m, they found out that customers did not really feel comfortable with the idea.

The litmus test to put to business models, must cover:

1. Does it meet customer needs?: Is there a large enough target market segment willing to buy or use the product/service that the business is wanting to sell? It is essential that business models make sense and that there is a large potential target market.

2. Do the numbers add up?: Firstly, are the forecasts and projection based on solid foundations? Many a time when assessing businesses, I come across assumptions that seem to have been pulled out of a hat and  projections that are quite unrealistic. Secondly, have they taken the costs of doing business into account realistically? In the end, if the numbers do not add up and the business does not have a good plan, the chances of success and making money are very slim.

3. Is the business model scalable?: Investors and potential partners are always more interested in a business which has the ability to scale. Look into the future to see how the business model can be expanded and what it will cost the organization. If IPO and becoming an attractive takeover target is your goal, the business model has got to be scalable.

4. Can the business model be easily replicated?: Almost all models can be replicated. However, how much does it cost, and how long before your competition catches up? Look at DELL, it developed a business model which was very difficult for its competition to replicate because of its existing distribution channel agreements. Hence, even though the model could be replicated, they chose not too because they could not match it.

Listed above are a few things to keep in mind when developing an answer to the above question. It is important to clearly communicate how the business will make money, what assumptions the forecasts are based on, and whether it has the ability to scale. Investors are looking for something unique yet simple. It is challenging to find this balance, however if you do, success is right around the corner.

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