Lets talk about the inventory represented in your balance sheet and how we can break it into segments. The purpose of looking at your inventory in segments gives you several views to help you manage and monitor your progress.
Fast Movers: This segment is where you make most of the profit in your part department. A good rule of thumb is items that turn over (sale) at least once every three months. This segment is what I call the working inventory. It does all the work making profit and carries the other two inventory segments. They consist of your service items like oils, filters, plugs, tires, brake pads, etc, and the G&A you sell regularly.
Slow Movers: These parts are the ones you sell at least once every 9 months. This segment still has a chance to sell but you have to be proactive to make it happen. This is your lazy parts, they just lay around doing nothing and every now and then they will contribute to profit.
Non Movers: This is the 9 month and older segment of your inventory. This is where the example of the apple merchant and the shelf life of apples comes into play. These parts have remained unsold for 9 months or more. In reality this segment is a total loss for our businesses. Think about it this way, we have invested our profits into parts that it turns out have went stale and rotten on our shelves.
Now that we have the segments defined we can see that the Non Moving segment is the one we should be focusing on reducing. The Fast and Slow movers will either continue to turn, or will end up in our Non Moving segment eventually. If so, we will deal with them then. One thing you must remember is you long ago paid for ALL the items in this segment. Our approach should be one of recapitalization, not one of profit. My point being, if you were going to make a profit, you would have done so by now. Our goal should be in getting as much of our investment back in an efficient, monitored, and managed process while eliminating the practices that caused it in the first place.
So, back to using our P&L and Balance Sheet as one report. We know the one segment of inventory we need to really focus one is the 9 month no sale (Non Movers). And since all the DMS can easily spit out a report of this segment we should use this inventory segment as our inventory baseline to use with our P&L. More specifically, we should use the change from month to month of this segment. Remember, you own this inventory out right, so the more you reduce, the more you add to your operating capital. (Note* One exception: Writing off and disposing of your inventory. This does not work in this process. If you write it off it is now at zero, but you have also generated zero income. I know I’ll get the comments, so I wanted to address it.)
The biggest reason I recommend using your 9 month no sale instead of your entire inventory file is to avoid counting a sale twice. Your entire inventory file contains your fast moving parts that you are going to make a profit from during the normal course of business. To count any reduction because of this as additional cash flow would be misleading. Also, using the 9 month no sale allows us to by pass any dating or net 30 terms issue. Most of the time we pay next month for the items we sell this month so in true cash flow implications, it could get very confusing.
I am going to create a spread sheet to allow us to track our progress. If you would like a copy, just subscribe to this series and I will send it to you for free. The object here is to use this increase or decrease of our No Sale segment to boost or reduce our profit on the P&L thus giving us a more accurate view of the profitability or our parts dept. With this process, we will no longer have profit hide on our balance sheet.
In Part 4 we will get a little deeper into this. Also, some of the things we will cover in following segments will be: methods to target, getting your staff on board, additional measurement tools, and long term implementation.
I am continuing this series over several weeks. If this is interesting to you and you want to subscribe to the series click here and put in your email address.
This will give you some extra content and view points and will allow you to give your input if you so desire. As always your email will be held in confidence, we don’t share or sell them. And just so we are clear, this is FREE, I’m not going to try to up sell you later. Join in….
Bobby Franklin CEO,
DustyMoto
bobby@dustymoto.com
twitter: @dustymoto