July 2006
Turn Old Stock Into New Money
Insurance - Your Bridge Over
Troubled Waters
Protect Yourself From
Internal Fraud
Use Cost/Benefit Analysis For
Decision Making
 
Turn Old Stock Into New Money
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 rethinking, 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 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.
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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.
Business Interruption - expenses incurred if the business is
interrupted by fire or other natural events. A
business may be forced to close for any number
of reasons including a power failure, a fire to
a neighboring business, a war or even the
failure of a key supplier. Having business
interruption insurance can save a business
allowing it to continue covering costs such as
salaries, utilities and rent, as well as lost
profits, until the business reopens.
• Crime Coverage - covers the theft, disappearance or
malicious damage of company assets
• Directors' and Officers' Liability - indemnifies officers
and directors of the company for legal expenses
and court costs incurred as a result of acting
on behalf of the company
• Employment Practices Liability - covers lawsuits brought by
employees for such things as sexual harassment
and wrongful termination
• Errors and Omissions - covers claims for commercial
malpractice and for errors and omissions in
providing services
• Health and Medical - covers health and medical needs for
employees and their dependents
• ‘Key Man’ Life Insurance - a life insurance policy payable
on the death of a key employee. This can include
the owners of the business.
• Liability - liability for injuries to people or property
caused by your company or by the actions or
negligence of its employees
• Motor Vehicle - liability for injuries caused by your
company’s vehicles and by your employees’
vehicles when used for business purposes
• Product Liability – liability in the event that an item
manufactured or developed by your company is
responsible for an accident, injury or death.
There can always be a significant risk of injury
from manufactured products. Safety measures and
precautions taken in producing the product and
explaining its use are factored in when
determining your premium.
• Professional Liability - protects professionals from claims
made against them personally for errors made
while they are performing their services
• Property Damage - damage to your business property due to
fire, wind, explosion, accidents, robbery or
theft
• Website - covers various claims such as libel, copyright
infringement and damages to computers and data
as a result of vandalism and viruses
• Workers' Compensation - covers injuries to employees for
work related matters
This list is extensive but by no means comprehensive.
Check your existing coverage against the list to
make sure you have everything you need. You
should also check the fine print in your
existing policies thoroughly to be certain they
actually provide the level of cover you need
them to.
Many businesses carry ‘umbrella’ insurance packages
that supposedly cover all the basic SME
insurance needs. However, you should read the
fine print carefully to make sure there are no
gaps where your business specifically needs
coverage. Also be sure to ask about the scope of
the coverage, exclusions from coverage and the
policy's deductible amounts. Insurance isn’t
worth a cent if it doesn't provide the cover you
need when you need it.
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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.
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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 needs 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.
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