Small Biz Owners: Here's How To Manage Inventory Levels Over The Holidays

If you run a small business, the holiday shopping season represents a mixed blessing of sorts. It’s likely one of your busiest and most profitable selling times of the year. It’s also potentially problematic when it comes to managing inventory levels.

If you order too much stock and fail to sell it, you could end up with a cash flow problem after the holidays. Alternatively, if you don’t order enough, you risk alienating potential customers and, of course, losing sales.

Sabrina Parsons, CEO of Palo Alto Software, a company that provides content and tools for small-business owners, outlined the problems associated with holiday inventory management and offered tips for small-business owners to help alleviate those problems. Credibly recently sat down with Parsons to discuss the issue.

Credibly: What should small-business owners do to help them set inventory going into the holidays?

Sabrina Parsons: Part of what they need to do is really understand what the benchmark numbers are in their industry for inventory. You can look those up. Google is such a great tool these days for small-business owners.

You’ll get a sense of how many months of inventory your type of business keeps on hand and what the average value of that inventory is — which is useful for so many things.

From a planning perspective, if you know that in your industry you should have three months of inventory and your minimum order of inventory is $10,000 that means you have $30,000 of cash tied up in inventory. You need to plan for that.

Keep in mind that’s just on average. Going into the holiday season, you will probably have to beef that up. At least you will have a benchmark number to go on.

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What are some of the hazards of not knowing that benchmark and not having sufficient stock on hand?

We work with businesses who don’t have enough cash to get sufficient inventory for the holiday season and they don’t realize how much money they are leaving on the table.

People coming into to their online stores discover the product isn’t in stock and leave. You have to have enough stock to service your customers. It’s not just a matter of losing one sale. You lose future sales because customers will say, “Last time I went to your site, you didn’t have what I wanted in stock.”

The first thing to do is to understand what the inventory benchmark is. How much, on average should I have in inventory and what does a monthly inventory purchase look like?

They also need to understand that probably if they sell a lot in December, they’re not going to sell a lot in January. They might want to take a rolling average of November, December and January and have those three months in inventory knowing most of it will go in November and December.

The other part they want to make sure they understand is that as they go into the holidays and they get inventory ready to appropriately understand all the costs in selling over the holidays.

There’s going to be potential shipping surcharges to make sure customers get their orders on time. They also have to make sure the inventory can be delivered in order to satisfy a holiday timeline.

It sounds like being understocked is the greater sin. What about having too much stock on hand?

The biggest issue with being overstocked is the cash side of it. As a business owner, you don’t want to come to February and run out of cash and go bankrupt.

You just have to understand the implications on cash flow. If you can manage the cash side of it, it is better to be overstocked than understocked.

What’s a good timeline for taking these steps to prepare for the holiday season?

The best thing a business can do is get into the habit of a quarterly review of inventory. The best time to look at things is with 90 days of lead-time before a big season. If you have more time you can do more research, make sure you’re getting the best prices and so forth.

Every 90 days you should be looking at your vendors and suppliers. You should be looking at how much you sold last year, which items you sold out of, what ended up as excess. It’s the time to do an assessment on last year’s holiday sales.

If you realize you are going to run out of certain items, how can you minimize the negative impact?

The most important thing to do is be honest with customers. Customers hate to think they ordered something and find out four or five days later that it was out of stock.

From a customer perspective, they’d much rather know up front. This involves being customer-centric, having tabs on your inventory and reporting to a customer that an item is not available as soon as possible.

Communication is key. As items go out of stock, being cognizant of how to communicate this to customers is important.

The great thing is there are fabulous tools now to manage that in an automated way. There are great inventory and shopping cart tools that help with this.

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What about excess inventory – what then?

Depending on the type of business and the items (assuming they’re not expired or seasonally inappropriate), January and February can be a great time to send “deal” emails out to your customers. Let them know you are overstocked and there are some great bargains to be had.

You can also sell through places like Amazon and eBay and Etsy. Just be sure you know the true cost of doing that. There are many fees involved. Don’t slash prices so low you actually end up losing money.

Now, if you have to move the merchandise and know you’re going to lose money, at least make it a purposeful decision and try to recover whatever you can.

In terms of inventory management, you mentioned tools that business owners can use. What are they?

I still think the biggest thing is knowing what it costs to sell through different online platforms. There are a lot of great tools out there and one I love comes from a company called Stitch Labs that basically allows you to connect to all these online selling platforms, plug in all the different ways you are selling and actually get a real “cost per item.”

For online selling there are all these different fees – depending on what plan you choose – and it’s not always easy to figure out what it costs to sell items on various platforms.

Tools like that are important because if you’re selling online you need to be listed on as many platforms and search results as possible. At the same time, you need to understand what it costs so you don’t price so low that you don’t make any money.

What about planning and management tools?

Our Live Plan product is an online planning and management product. Where it is useful is for understanding the implications of inventory on available cash.

You can build your sales forecast, build in cost so you understand your margin, set your inventory assumptions, including how much each month is worth in dollars. Then you put in all your other expenses and cash flow assumptions and you actually get a cash flow forecast.

This is all helpful because small-business owners often confuse profit with cash flow. Most small-business owners do not have MBAs. So, they look at the QuickBooks P&L and ask, “Why doesn’t that profit number at the end of the month equal the money in my bank account?”

At the end of the process of using our software we can help a small-business owner understand cash flow and, for example, realize that based on assumptions, they may need to get a $60,000 credit line or loan because that’s what it’s going to take to make their plan work.

What about planning for the future?

Take the time to do the forecast and build important data points. Then when you see the results in QuickBooks (or whatever you use) compare “actual” with your “plan” and if they are different, try to determine why.

Did you, for example, decide at the last moment not to participate in a holiday fair that might have increased sales?

Also, compare the current period with previous periods – especially from a year ago. Many small-business owners compare November with October of this year. For a variety of reasons that may not mean much.

It’s more important to compare this October with last October – this November with last November and so forth.

Overall, it’s important to have those data points so you can compare expectations with reality and adjust accordingly.

Jim Probasco contributed to this report.