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 Patience

“Patience is waiting. Not passively waiting. That is laziness. But to keep going when the going is hard and slow – that is patience.” Anonymous

When we read about the lives of great men and women, we find a common thread in their stories. That thread is patience. In today’s day and age of instant gratification, patience levels are at a steep decline. Too many people are moving too fast, too soon. Their lives are checkered with dissatisfaction and frustration. Lack of patience has a definite impact on the entrepreneurial journey as well. If wanting it all yesterday is a priority, this path does not have what you are looking for. Patience is a virtue which cannot be learned through text books or courses, it is acquired through experience. We are all constantly placed in situations where our patience is tested, the manner in which we choose to react to these situations, determines our patience tolerance level.

Listed below are five steps to understanding situations where patience is tested, and sequential consequences if patience is not exercised:

1. Strategic Indecision: Instant success for entrepreneurial start-ups is a rare anomaly. If you embark on this journey, make sure you realize it is for the long haul. It will require remaining committed to your strategy, and to constantly adapt it to market demands. Inability to adapt and change will give rise to growing impatience which will impact negatively on your business. To read more about patience and strategic indecision please click here.

2. Marketing Results: The secret behind companies who market themselves successfully, is patience. Once they formulate a strategy, they remain committed to carrying it out to the end. Do your best to remain consistent in the messages you send out and ensure you send them out regularly. Once the messages are out there, be patient, results will follow, in time! To learn more about marketing and patience please click here.

3. Handling Customers: Prospects and customers have an uncanny ability for getting under your skin, often driving you close to insanity. It is important to learn to keep one’s composure when dealing with difficult customers. There are several strategies which can be employed to help relieve some of the frustration, these include correct identification of prospects, using CRM software and having disqualification processes. To learn in greater detail about customer handling strategies please click here.

4. Employees: Managing employees effectively requires great levels of patience. They can be a handful, specially when the organization is growing rapidly and micro management is not an option. To help develop  patience levels for this, learning to set realistic expectations and providing continuous feedback is vital. To learn in greater detail strategies for management of employees please click here.

5. PRICE of Impatience: The price of impatience is, pain, regret, irritation, close-mindedness and becoming emotional. Each one of these can have a defining impact on your business, team and relationships. By not developing adequate tolerance levels to handle the complexities of business, reaching one’s goal can be a challenging process. It is important we learn to ask ourselves “Can I afford the price of my impatience?”. To learn more about the price of impatience please click here.

Developing a high threshold of patience, helps make the difficult challenges we face daily, more manageable. It enables us to enjoy life in a more fulfilling and satisfied manner, which in turn helps us to go on to achieve great things. Everyone will have moments, when lack of patience gets the better of them, keeping these incidents to a minimum, and being vigilant and pro-active about such lapses is essential. It is only when we become aware of patience thresholds, can we work to keep increasing them.

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The Price of Impatience

“One moment of patience may ward off great disaster.  One moment of impatience may ruin a whole life.” Chinese Proverb

This week we discussed several scenarios where patience is tested on the entrepreneurial journey. For the last post of this series I will focus on the ‘price’ we pay for lack of patience. Understanding the price of impatience is as important as developing patience. All of us have experienced instances where our patience gave way, and we did or said things which impacted negatively on our life and caused regret. What is important, is that we learn from these temporary lapses and ensure they do not occur again. If we don’t, we run the risk of always being angry, upset and dissatisfied with the progress of our growth. 

Outlined below is what I define the PRICE of impatience to be:

1. Pain: Whenever we lose patience, we cause pain to both affected parties. Often, this is embedded in our subconscious and a recall of that memory, can be a painful experience. There are times when a degree of pain helps us realize all that we should be grateful for. Too much pain however, can be the cause of major instability in life.

2. Regret: Sometimes during lapses of patience, we find ourselves doing and saying things, we would never do ordinarily. It all happens so quickly, and we only begin to understand its impact after everything is said and done. That is when the regret sets in, and if we fail to move forward at this point, it has a domino effect on the self. Regret about something which happened in the past is definitive only by the lesson we learn from it, we must learn to avoid acting in a similar manner again.

3. Irritation: Patience and irritation are negatively correlated, when patience is on the decrease we experience a heightened level of irritation. Nothing and nobody seems to be right anymore. It is like a virus that drains energy out of a team. We have to keep this emotion in check constantly when we are running low on patience, it is one of the easiest ones to give into. 

4. Close-minded: When we lose patience, it is like a switch goes off and blocks everything around us. We become increasingly selfish in our outlook and begin to believe that only we know how to do anything right. This is a dangerous path to tread, the price we pay for this attitude is a serious one. 

5. Emotional: We lose our patience and suddenly, all logic and rationale goes out the window and we find ourselves making emotional decisions. These are usually clouded with the false notion that we know best. This also triggers our saying and doing things that have the ability to cause pain and suffering to those around us. Is a lapse in patience really worth destroying something you may have spent a lifetime nurturing? 

Whenever you find yourself in a position where your patience is wearing thin, ask yourself the following question: “Can I afford the price of my impatience?”. It is important to take into account the larger picture. If we do not, our outlook will remain selfishly restricted to me, myself and I. Is it really worth it?

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Employees and Patience

“The five steps in teaching an employee new skills are preparation, explanation, showing, observation and supervision.” Bruce Barton

Two characteristics often found in entrepreneurs is, the need for perfectionism and control. When teams are small, this works to their advantage, however, when business expands, these characteristics tend to be more disruptive by nature. For example, when the business starts to grow, it is inevitable that more resources will need to be hired to keep up with growth. The selection process itself is a difficult process for start-ups with limited experience. The real fun begins when you have these new resources on board and most of the time, they don’t know what they signed up for. Earlier on, I expected the same work ethic, dedication and sacrifices from them as I did of myself. That didn’t go so well, I soon found myself getting impatient as I had set unrealistic expectations. My perception of the scenario was biased, in the process I lost many good people. I learned a thing a two about patience during this time.

Some of the key things to keep in mind next time you feel your patience wearing thin are:

1. Set Realistic Expectations: To expect the people who work for you, to make the same level of sacrifices that you may be making is not correct. From the word go, we have to temper our expectations and more importantly, outline them before you start the selection process. This way, while recruiting there will be more detail, which will help the prospect to make a more informed decision. Keeping broad guidelines for what you want from an employee, will result in both sides being negatively effected.

2. Holding Hands: The on-boarding process takes time, this is the time to help the employee make necessary adjustments to fit into the organization. Bring them up to speed with the projects they will be working on and acquaint them with all the set processes. It takes an average of 1-2 months to bring an employee up to speed, till they start contributing to their potential. Make sure you help them as much as possible to speed up the process.

3. Feedback: We are all human and we all make mistakes sometimes. Instead of coming down hard on an employee regarding their work ethic, performance or behavior, provide feedback on steps to take to bring about positive change. Doing this effectively takes time and a lot of patience. Even when they mess up the proposal, don’t do a good job at that presentation or keep coming late to work, provide them with timely feedback. 

These are simple steps to take, to help become more patient with your employees. Incorporate them into your organization and see increased performance results, calmer working environment and a motivated workforce. Along the way, you will develop the patience required, to scale the business further and help manage people all over the globe. Remember, it is not possible to do everything ourself. Learn to sacrifice a little bit of that perfectionism and control, it will go a long way, in the larger scheme of things. 

Related Articles:

5 Steps to Hiring Better

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Are customers testing your patience?

“You can’t just ask customers what they want then try to give that to them. By the time you get it built, they’ll want something new.” Steve Jobs

Prospects and customers have an uncanny ability of getting under your skin, often driving you close to the verge of insanity. It all begins when you begin to identify potential prospects for your target segment. Those first couple of cold calls, emails and introductions set the wheels of the sales cycle into motion. Then it begins, the non responses, the transferring of your calls all over the company, being on hold for ages and even some rude responses. At this level you need to be somewhat thick skinned, you should then not have a problem getting through this stage with a list of higher probability prospects. It is during the next couple of stages when you have initial meetings, send proposals and quotations that your patience really begins to get tested. This stage differentiates the sales people who succeed, and those who just get by.

Over the last couple of years some tips that helped me during this period are:

1. Prospect Selection: In today’s market place, no one really cares for the generalist anymore. It is slowly becoming a market where niche specialists have a marked competitive advantage. I would therefore suggest you tailor your sales strategy to focus on a particular market segment and cover it extensively. If your prospect list selection covers any and everybody the number of mild leads will drive you insane. Be selective and choose your segment wisely. Next build a prospect list specific to that segment and start to make inroads.

2. CRM Software: If you are not using one for your sales development and pipeline monitoring, I would strongly suggest you look into one for your organization. If you haven’t used CRM software before, start by using simple systems such as the ones available at 37signals.com. These help tremendously in making correspondence with prospects structured, efficient and professional. It also allows you to get a dashboard view of what is moving in your pipeline and what is not.

3. Disqualification: Customers who are not interested or ready for your product/service at the present moment should be disqualified from your list. These are clients who gather information from you, and then become dormant. I suggest you develop certain time quotas, after which, if the prospect does not respond they should be disqualified from your qualification process. If this step is not done it will drain a lot of your time without necessary results. 

4. Contracts: Once you have signed up a customer for your product/service, make sure you sign comprehensive contracts with them, these must cover exactly what you will be delivering to them. Failure to do this will result in some customers asking for more than promised and you will find yourself in a difficult position. There are few things more irritating than a customer who continues to ask for changes, reviews and modifications during the delivery process. 

I don’t completely agree with the statement that “the customer is always right”. There are some situations when you will have to draw the line. Difficult customers end up costing the organization a great deal. They increase the level of frustration within the team and decrease morale. Constantly review your prospect and customer list, I use a rating system in some of the companies I work with. This lets the entire team know which customers get priority over others. Focus your energy on those leads and customers where you have the greatest ability to cross sell and develop deep relationships with.

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