Autobarn franchisor on how franchises can succeed

Amos Bush, chairman of the Clark Rubber franchise and former chairman and managing director of the Autobarn franchise. Autobarn is first and foremost a retailer. To succeed in retail, says Bush, you must know how to manage and control stock.

If I have learned only one thing as a retailer, beginning as a salesperson in a small retail business, and finishing up as the managing director of one of Australia’s largest and most successful retail franchise systems, it is that to succeed in a retail business you need to know how to manage and control your stock.

You must know:

• What to buy,

• When to buy,

• How to buy, and

• How much to sell it for.

A simple fact known to mankind since trading began. It is a cause of great concern to know that all too often, people go into business investing every cent they own, and borrowing additional funds, to start what they hope will be a successful retail business, only to fail in their endeavour. There are any number of reasons why people wish to go into their own business, but a desire to fail, is not one of them.

To be successful, it is necessary to understand some of the basic elements that drive business and can make the difference between success and failure. There may be many reasons causing a business to fail, but all too often they fail because their owners got into it:

• undercapitalised,

• unprepared,

• or for the wrong reasons.

But the biggest cause is the lack of proper planning.

That means that they go into business without having any direction or a clear strategy to take them to where they want to be.

A study conducted by Prof. Allan Williams some years ago, showed that about 32 percent of businesses fail in their first year, 16.5 percent fail in their second year, 13 percent do not survive past their third year, 7 percent do not see it through their fourth year and 5 percent fail by the fifth year. In other words, only 25 percent of businesses are still in existence after their fifth year. A dream, an ambition, or a desire to achieve some form of recognition, are not good substitutes for proper planning and hard work.

The essence of a good retail business

The essence of a good retail business is based on the following elements:

• Innovation – having a clear point of difference from one’s competitors.

• A proper business plan

• A realistic budget

• Sufficient funding, or known sources available from which additional funds can be obtained;

• Trained staff

• Required stock levels

• Proper stock management and stock control systems

• And a clear marketing strategy

The lifeblood of any business is having a positive cash flow. Just as the human body cannot function and survive without a sufficient and healthy blood supply, so it is with business. It cannot survive for long, without a positive cash flow, let alone grow and flourish.

There are two generators required to achieving this, these are SALES and STOCK, two sides of the same coin; one cannot exist without the other.

You cannot achieve the required level of sales if you do not have the right kind or the right level of stock in the first place. In other words, proper stock management and control are essential.

It is the lack of a proper grasp of the relationship between the two that is the greatest impediment to running a successful business.

No business, big or small, should be managed without a Business Plan. This need not be an elaborate document; it can be kept short and simple, but must contain all the necessary elements to make it meaningful and useful. All it needs to do is the following:

• spell out the reasons one has gone into business,

• what one wants to achieve in their business,

• how they intend to go about doing it,

• the costs involved,

• the funding required,

• the budget,

• and a list of the performance indicators to help measure the results at regular intervals.

It is a road map. It tells you whether you are moving along the right track, and if not why not. You need to have a regular review and fine-tune it from time to time, in order to ensure that you achieve the desired results. It helps to highlight any weaknesses, or problems, and gives a warning of any issues that might arise that need to be taken care of before they become a serious problem. The whole basis of stock management and control is directly linked to the requirements of the business plan.

Stock management is the process that one must follow in order to ensure that the business is keeping the right kind of stock at the appropriate levels, at all times, to achieve the levels of sales budgeted.

Stock control is the tracking of stock from the moment it arrives in the store, and tracking its movement through the store until someone takes it, pays for it, and takes it out of the store.

It is the way one follows the system, monitors the results and ensures that the level and type of stock held in the store is in accordance with the requirements of the business that will ultimately determine whether the business will make money or run out of it.

It is surprising to find out how many people think they are running a successful and profitable business, only to be shocked to discover that they are tight on cash, all because they did not keep an eye on what is happening to their stock.

Tracking the movement of stock is essential to knowing what is happening in your business. If you have too much stock, it can cost you a great deal of money just keeping it on the shelves. It has been calculated that keeping the stock on the shelves in the store costs about 20 percent of the cost value of the stock held.

Just think of it! If your average stock-on-hand level is about $200,000 per annum, then the holding costs can amount to about $40,000 per annum. If your annual GP is around 50 percent (i.e at an average mark-up of 100 percent) and your annual sales at about $1,000,000, your GP would be reduced by about 8 percent.

Of course, the cost of holding stock is part of running a business, but the better you control your stock and the greater the number of stock turns you can achieve, the lower the costs of holding it. In other words, the higher the number of times you can turn over your stock per annum, the less stock you need to keep and the lower the costs of holding it. The cost of holding stock includes but is not limited to the following:

• Interest charges for the funds employed

• Insurance

• Spoilage, damage and obsolescence

The secret of good stock management is knowing:

• what stock to buy,

• when to buy it,

• how often to buy it,

• and what quantities to order to meet customers demand.

There is a fine line between low stock holding through good management and low stock holding through bad management. There is a difference between keeping stocks at a lower level because of the number of stock turns achieved, and having too strong a focus on a lower level of stock to keep costs down.

This could mean not having the right level of stock at the right time to meet customers’ demands. Consequently, you will miss out on sales resulting in not only being unable to achieve budgets, but alienating ones customers in the process.

Bulk buying

Every retail business has two levels of stock requirements. One is to keep reasonable levels of core stock on the shelves, and the other is to buy bulk stock for a specific campaign, or special event, in the hope of achieving high sales volume. This can also apply to special purchases of core stock lines meant for a special promotion, for a specific period. Our knowledge, experience and ability to accurately monitor our sales will determine the level of core product purchases.

We know how much we are likely to sell over a given period and it depends on the frequency we need to order and the added costs involved, such as freight, that will determine the quantities we need to purchase at any given time. Thus, if we manage this process correctly, we will have sold these products, and got the money for them, before we have to pay for them ourselves.

It is important to understand that to buy any of the core products in larger quantities than is necessary to meet demand, except when planning a special promotion, can be unwise unless the additional savings obtained are quite considerable, and thus justify the extra money tied up by such a purchase. When an opportunity arises to bulk buy, the following must be carefully considered:

• The quantities one is required to purchase.

• The popularity of the items offered.

• The quality of the goods.

• The full amount of the investment, and terms of payment.

• The expected period it will take to dispose of these goods.

• The net GP generated.

If the goods purchased cannot be sold before payment becomes due, great care must be taken to ensure the goods don’t remain in stock any longer then absolutely necessary, and are promptly disposed off to retrieve the balance of the investment with the minimum of delay, as holding on to such goods could create a serious cash flow problem.

A bargain is not a bargain unless it can deliver the hoped for GP within strict time limits.

Lay-bys

To encourage customers to lay-by is a very effective tool in the hands of retailers to generate extra sales. It is very effective if managed properly. If not, especially in a small business, it has a potential of growing into a monster and instead of generating extra income it can become a drain on their financial resources.

The law requires that an item sold on lay-by must be put away and held for the customer for the period of the lay-by. So, whist the item is deemed SOLD, in reality this is not quite the case. True, as far as the business is concerned the item is technically sold and taken out of circulation, and replaced by another. But, until fully paid for and picked up, it is actually a liability to the business. The other thing to bear in mind is that the bulk of items on lay-by are among the more costly ones and could negatively impact on the business’s cash flow if not properly controlled.

Here are a number of suggestions on to how to reduce the potential adverse effect of lay-bys on the business finances.

• Strictly limit the period of the lay-by to no more then three months.

• Require regular payments. Weekly, where possible, but not less than once a month.

• Always check that payments are made by the due date.

• Regularly monitor the final date by when an item on lay-by must be picked up.

• Do not keep on lay-by any items belonging to non-complying customers any longer than required by law.

Keeping in mind that it is not only a cost to the business you need to worry about, but the possibility that the unpaid and uncollected item could become obsolete and unsellable during that time.

Faulty goods

It is surprising how often a business lets faulty goods accumulate before returning them for exchange or credit. The cost to the business can be quite amazing. If not managed properly, it can have an adverse effect on the business’s GP and cash flow.

When goods arrive in your store they must have the invoice, or some other document attached, showing the number of units delivered and the prices charged. You cannot accept anything less, because without it, you do not have the means to check the delivery and the accuracy of the charges. If you have the invoice check it first against your order and then check that the items and quantities supplied correspond with the order. Price the goods and put them on the shelves, always ensuring that the shelves are fully stocked, before you put the balance in the storeroom. Remember that stock on the storeroom shelves does not sell. It only sells once it is placed on the shelves in the shop.

An annual stock take tells you the total value of the stock you carry and the unit count of each of the items in stock at the time of the stock take. This is not enough to maintain a proper control over your stock.

You need to carry out regular random checks of popular and highly priced items to ensure that any goods missing off the shelves have actually been sold and the money received and put through the register.

Shop lifting

As we well know, shoplifting is a plague that retailers have to live with, but if not properly monitored and appropriate precautions taken to try to reduce it, it can often mean the difference between making a profit or showing a loss. Whilst this plague is difficult to control, regular random stock checks and the introduction of monitoring procedures could act as a deterrent and help reduce the incident of shoplifting, both from without and from within. This said, it is also a good way of checking the rate of stock movements to ensure sufficient stock is always available to meet demand.

Maintaining a healthy cash flow

Let us now deal with issue of stock turns. If the average stock turnover in your store is four times per year and your average GP is 50 percent, accepting the 80/20 rule which says that 80 percent of your sales are generated by 20 percent of your stock, means that some items have a much higher turnover than others.

The simple fact is that the more stock turns you achieve, the less stock you need to carry, the more Gross Profit you can make. It is how you manage your stock which can make all the difference.

Thus we can say that every item on the shelves in your store should be turned over at least once every three months. That means that anything that has not sold even once during that period should be cleared out and the money used to buy more popular stock which can be turned over more frequently.

When you buy stock, you are expected to pay for it within 30 days of the month following the delivery of the goods. Have you ever stopped to think that if you have four stock turns a year you are actually only getting paid for your stock around 90 days from the date of purchase. Which means, depending on the level of the stock held, that you have a lot of capital tied up in your stock. So when you work out the mark-up on the goods you are selling you need to take this into account. And as I have mentioned before, the more stock turns you achieve the harder your money will work for you, the lower the cost of finance.

I do not know how many small retail businesses still manage their stock manually. To those who still do, I would strongly suggest to get a computer and a suitable software program that can be easily tailored to their requirements. You will be surprised at the difference this will make to your business and the way you manage it.

It is important that you do not see this as an expense; you must see it as an investment in the future of your business.

Read more about buying a franchise and running a franchise.