Building Inventories In Anticipation Of Increased Demand? Don’t.

Far too many small business owners are believing the hype and responding to it against their better judgment by building inventories in anticipation of increased demand in the fourth quarter–the Christmas quarter–when sales typically expand.

Let get a few things straight.

Consumers are spending less. More of them are out of work, many fear getting laid off and others are simply reducing debt and saving their cash. The economy is not turning around. It is declining in real terms. We are not yet out of this recession and will not be for quite a while longer, likely for years.

Are there moments of increased demand? Sure. Are some industries doing better than others? Yes. Are some areas of the country managing more effectively than others? Absolutely. So, of course, individual judgments are appropriate and may vary from my commentary, but as a whole, the economy is NOT getting better. The fourth quarter–the Christmas quarter–will be a bust with flat sales, not bolstered by expanded revenues and greater demand as is being hoped for. Thus, increased inventories as a general concept are inappropriate and self-destructive. It costs money to build inventory and the merchandise holds your capital hostage until sold. This recent reported build-up of durable good inventories, as well as the similar build-up of other soft consumer goods, is folly and not to be taken as an indication that things are better and that it’s time to expand.

Unfortunately, keeping inventory levels low can also create a self-destructive result as lower inventory means lower potential sales revenues. If there is a sales spike, there will be only so much to sell–you cannot sell what you do not have. On the flip side, if you size your business more realistically, hold inventories to a reasonable amount rather than to an expanded projection and balance your business to be profitable based on reduced sales volume, you will have fewer dollars invested in inventory. Or should I say, fewer dollars locked up and unusable in inventories that will not sell this season, doing you no good whatsoever and destroying your potential for profitability this year. If you miss a sale, it will be ok if you’ve designed your business to be profitable. That is the good news. The sale you lose due to lower inventory is too risky and expensive to prepare for. It is ok.

People, be realistic. With fifteen million people out of work, millions of homes in foreclosure and no credit available for growth and development, how can we be projecting an increase in demand and sales revenue in any sector? While there are many individual success stories going on out there, it is not a good bet to increase inventories in anticipation of greater sales demand unless you have solid reason to believe this, such as currently increased revenues and greater demand today, indicating growth potential for your business this fourth quarter. Be smart and size yourself downward. Balance your business on lower sales volume, make yourself profitable and hold light inventories. This works.

Just as important, or perhaps more important, is the one area that will tank your business faster then a speeding bullet. An issue far more dangerous than inflated inventories is debt you cannot afford. Do the debt workouts now and free yourself from overhead you cannot afford. Debt you incurred when your revenues were much higher must now be worked out and forgiven. That’s the biggest issue at hand and the most important, far more important then inventory levels.

Figure it out, stabilize, reduce debt and hold your inventories down. Force profitability and be prudent. The recession is not over and will not be for some time. This is not a passing cloud, it is a long-term funk.

Call Norm at 413-584-2581. He will arrange a no-obligation teleconference for us to review your situation and create the strategy that will work best for you.