Turn Old Inventory Into New Cash
	Insurance -- Your Bridge Over Troubled Waters
	Protect Yourself From Internal Fraud
	Use Cost/Benefit Analysis for Decision Making
	Memorable Quotation

Any business based on selling products usually winds up with a gradually mounting store of items that failed to sell and don’t look like they ever will. Even service businesses can accumulate large amounts of leftover materials and other items for which there’s no longer a use. This ‘dead’ inventory represents cash, and every day it’s left to gather dust is just more profit whittled off your bottom line.

If you’re a retailer you can always have a ‘special’ sale to get rid of old stock, but if it didn’t sell before there’s a good chance that it won’t sell now, unless you’re willing to take a substantial loss on the transactions. And if you’re not a retailer you can always ask the company that sold them to you to take back unused materials, but even if they do, you can count on booking a significant loss. Surely there must be some better ways to deal with dead inventory than these!

Go Slowly

The only way to get rid of old stock quickly is by heavy discounting and taking a quick loss. If you want better then the solution has to be a longer term process. It’s a fact of life - old stock accumulates slowly, but to make any decent return on it it’s going to need to leave your inventory at the same pace.

Find the Underlying Reasons for Dead Inventory

Review your dead inventory and ask yourself how it got there in the first place. It may well mean that your purchasing policies need a rethink, or that your system of estimating sales is getting the numbers consistently wrong. Think about what isn’t there; what has sold quickly and never looked like being a slow mover. It may be time to review your product lines and make some deletions. There are important lessons for you to learn and apply to prevent any further buildup.

Analyze What You’ve Got

Some parts of your dead inventory will be older and less saleable than other parts. Break dead inventory down into three categories, according to how quickly you believe it can be moved: (1) Salvageable; (2) Hopeful; and (3) Truly Deceased. Each of these categories will require a separate solution, and there will be recoverable value in some but probably not all of it.

Salvageable stock - This will likely be the stock you can move the quickest. It may be possible to bring it out into public view again with a big ‘sale’ or ‘reduced’ sign that highlights the former price and clearly points out the savings. If you don’t want to try offering it once more, there may be another outlet nearby that sells a similar product and will take it off your hands for something close to the wholesale price you paid. The most important thing is to get rid of it quickly and turn it into cash before it becomes a Hopeful or Truly Deceased.

Hopeful stock -You can’t be sure about this but you can still be hopeful of finding a buyer, either by drastically reducing its price and selling it yourself, or by finding another outlet that will take it off your hands quickly. It’s probably salvageable but will take much longer and require more thought or effort to come up with someone to buy it. Don’t waste too much more time trying to sell it; give it one more chance if you must, then get rid of it for whatever you can get.

Deceased stock- Into this basket goes the hula hoops, pet rocks and Rubik’s cubes of your inventory. You might be lucky to catch a wave of nostalgia but it’s highly unlikely and you simply need to get rid of it and stop it from cluttering up your storage space. It may be a mistake to expose this kind of merchandise to your regular customers, so your task becomes finding someone to take it for free. Charities and thrift shops are two possibilities, but do a search on the Internet and you might find someone who’s still selling them and would be willing to pick up your deceased stock.

It Never Hurts to Ask

Instead of simply asking your suppliers to take back the dead inventory they’ve sold you at a loss to yourself, think creatively about what you can offer them. Do some thinking for them about what they might be able to do with it, possibly through other outlets or in other markets. Combine the return with your next order and make it a package deal. They’ll be doing you a favor so find something you can do for them as well.

The Three-Step Retail Solution

It’s not always going to work but, depending on your own circumstances, you may want to try the ‘three step retail solution’ approach. Set aside a special sale area and give the ‘deceased’ stock just one or two days exposure there at a ridiculously low price under a heading like ‘special purchase’. If this doesn’t move it, put it into the nearest dumpster or take it to any charity that will have it.

Next, take the ‘hopeful’ stock and put it out in the same space. Price it as attractively as possible and give it a day or two more than you gave the deceased stock. Whatever remains unsold, sell it as a job lot to anyone who’ll buy it and take it away. Finally, put the ‘salvageable’ stock there with the reductions highlighted and give it a couple of days more than you gave the hopeful stock before selling it off as a job lot.

You may just find that your customers respond to a clearly identified ‘sale’ area and will check it out regularly to see what’s there. If so, you’ll never have to worry about building up a ‘dead’ inventory again; you can clear slower moving stock in that space.

Insurance -- Your Bridge Over Troubled Waters

Something like 80% of all small businesses are not insured as well as they should be. Recent disasters like the New Orleans floods have given us thousands of examples where the ‘basic’ small business cover proved totally inadequate to cover losses - those businesses will never open their doors again.

Of course some types of insurance are mandatory in most jurisdictions - workers' compensation and vehicle third party liability insurance are two of these. The exact kinds of insurance you need will depend on your type of business, and it’s true to say that no two businesses are exactly the same. Here are some of the more common, and useful, types of insurance cover you can take out.

 Protect Yourself from Internal Fraud

Smaller enterprises are at the greatest risk from fraud, particularly from within the organization. They’re the least likely to have dedicated security personnel, and most likely to lack adequate internal systems and controls to prevent fraud. You can minimize your exposure to fraud by learning how it’s perpetrated in businesses like yours. There are also policies you should put in place to prevent fraud from occurring. We’ll start with the two most common types of fraud, fake invoicing and cheating on expense accounts.

Fake Invoicing

These common frauds are usually along the lines of an employee sending his own company a false invoice which is approved for payment. The employee receives payment that is thought to have gone to a legitimate supplier. The employee simply sets up a company as the fraudulent supplier, establishes a bank account for that business, and then begins sending invoices to his employer.

Frequently the employee has signature authority over the invoices that are sent, so approval is easily accomplished! It’s also possible that the employee is working corruptly with another employee to get the invoices approved. In any event, the company pays for something it never received.

There are variations to this type of fraud in which goods are actually supplied but the ‘vendor’ (the employee’s company) is overpaid for what is delivered. There are also instances where a third party colludes with the employee to overcharge for goods and refund a portion of the price to the employee.

Expense Account Frauds

In any business there are likely to be a number of employees with the authority to incur expenses on behalf of the company for which they will be reimbursed. These can vary from insignificant amounts, such as for postage and stationery items, all the way up to airfares and accommodation costs for sales staff.

Expense account cheating usually takes the form of wrongly describing the expense incurred or overstating it. Some expenses may have never happened, or were for personal use and not business related at all. Because it’s fairly easy these days to create ‘dummy’ invoices on a home PC, simply having a receipt doesn’t necessarily prove that expenditure actually took place. It’s also possible to copy a genuine invoice and increase the amount or change the details on it.

Well-Administered Policies are the Best Defense

Fraud is difficult to prevent and often very hard to detect. The best way to combat workplace fraud in a smaller enterprise is to have suitable policies in place and to unfailingly enforce them.

To deter employees from submitting fake invoices, payments should never be made to suppliers that aren’t approved by the owner, nor should a sudden increase in the amounts purchased from any supplier be allowed to happen without a valid reason.

All suppliers should be qualified before any orders are placed with them or payments made to them. This includes having full details of ownership and trading references that verify a history for the business.

Expense account frauds aren’t easy to stop, but once again having appropriate policies and enforcing them will help reduce the possibility of fraudulent claims being submitted. The most basic policy is to pay only for expenses supported by original receipts; photocopies or reprints should never be allowed.

Review the amounts of all expenses and be alert for overcharging or duplication. Be aware of every employee’s responsibilities and their need to incur expenses to meet them. If an employee’s claims show a sudden increase, be sure to query them for the reason as quickly as possible. Experience shows that if they get away with a fraudulent claim once, they’ll almost surely try it again.

Use Cost/Benefit Analysis for Decision Making

A cost/benefit analysis (sometimes referred to as ‘CBA’) is a management tool that will give you an idea of whether a possible course of action will yield positive or negative results. It does this by adding up the positive aspects of the action, and then subtracting the negative aspects from the positives. If the outcome is a negative number it’s an indication that the action will yield negative results and shouldn’t be carried out.

Different Types of Costs and Benefits

The various types of costs and benefits need to be taken into consideration. Both can be either one-off or ongoing. In the case of a business the benefits from making an investment are usually received over an extended period of time, while expenses are often up-front. This can complicate decisions about major pieces of capital equipment, and involve sub-calculations that take interest rates or lease fees into account.

In its simplest form a cost/benefit analysis is made using only current financial costs and current financial benefits. For example, a simple cost/benefit analysis of buying a new piece of earthmoving equipment would take into account only its purchase price (costs) and its expected earnings (benefits) over its useful lifetime. A more accurate approach to cost/benefit analysis would incorporate other factors such as depreciation, interest on money borrowed for the purchase, the expenses of maintaining the equipment, and operator’s wages.

Analysis Needs a Common Unit of Measurement

To reach an accurate conclusion about the desirability of a course of action all positives and negatives must be expressed in terms of a common unit, which is usually money, although it can be any unit from degrees of temperature to miles traveled if that suits the purpose of the analysis.

Another concern is related to the actual value of money over time. A project that costs a million dollars today and will bring in five million dollars over the next ten years isn’t really giving an ROI of 5 to 1. A dollar received in ten years will be worth much less than a dollar received today.

Options Need to be Given Consideration

When a course of action is being evaluated the analysis must include estimates of what benefits and costs will be if the action isn’t taken. By not proceeding with a new hospital the benefits will be a savings in expenditure but costs might include funds to beef up existing health services in the area to cope with population growth, as well as the additional costs of declining health standards.

On a larger scale, if a company in California is considering relocating to Tennessee it must consider such factors as the costs of retrenching much of its workforce, the costs of moving across the country, the costs of the new facility, the costs of recruiting and training new staff, and a host of other expenses. The benefits would hopefully come from moving to a lower cost labor market with perhaps better transportation links to key customers.

There are a number of software tools available to help with complicated cost/benefit analyses. Easier analyses can be done using just a spreadsheet. There couldn’t be any easier way to guide you in making decisions, yet it’s so simple it’s often overlooked. The real challenge is to ensure that you accurately identify and calculate both the costs and the benefits of the intended action.

Memorable Quotation

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” – Sun Tzu


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