Inventory Management for Creative Business Owners
Do you want to increase profits and bring down costs in your creative business?
In this video, I'm chatting with MY business coach, Gwen Bortner, all about how effective inventory management can help bring down your expenses & boost your profits:
In this conversation, we'll cover:
how to figure out if you have too much inventory (your inventory turnover ratio)
inventory management best practices including Open to Buy for retail shops
the pros & cons of wholesale vs consignment for makers & independent retail shops
whether it's better to do pre-made or custom order products as a maker or artist
Gwen Bortner is the founder of the business operations advisory firm, Everyday Effectiveness.
Gwen has a background in the craft industry, with years of experience as a professional knitwear designer & knitting teacher.
She helps visionaries scale their businesses to seven figures and beyond without the stress and overwhelm of trying to do it all on their own. Her approach comes from the belief that personal and professional success looks different for everyone, and most business owners waste time and energy trying to conform to outside expectations and definitions of success.
Video Transcript:
Mallory
Hi, Gwen, and thanks for joining me to talk about, I know, I think this is one of your favorite topics, inventory management and how that can be used to increase profits and reduce cost and expenses, right?
Gwen Bortner - Everyday Effectiveness
Yes, I am a weirdo. I actually love inventory. I love talking about inventory. And I am so glad that you invited me to be with you and to talk about this topic. Because it is kind of, it's a weird passion for me. And it's also something that doesn't get talked a lot about because it's kind of confusing. And almost every time I talk to somebody about it, they're like, well, no one's ever said that. No one's ever told me that.
Why is no one talking about this? So I love any opportunity. So thank you for inviting me. I really appreciate it.
Mallory
Yeah, so what are some of the common mistakes that people have when it comes to inventory? Like, is it possible to have too much inventory?
Gwen Bortner - Everyday Effectiveness
So the answer to that, almost always, is yes. For years I was a business teacher through the National Needlearts Association. And anytime someone would come up to me and they'd say, so I'm having a little trouble and I'm not sure, I'm not quite sure where to start. And I would say, you have too much inventory. And they're like, but I haven't even told you how much inventory you have. And it's like, yeah, that's almost always the...
The first issue is you have too much inventory. Anytime people don't have too much inventory, they have nothing to talk to me about because their businesses are super profitable, they're running really well. So it really is, the answer is probably yes. If you're feeling like you're not super profitable, you probably have too much inventory. And any client I've ever worked with, when we get their inventory to a correct level, they're automatically making more profit. And it's so counterintuitive, and they're always shocked, even though they trust me, they know I'm right, I've got plenty of case studies, that it's still like, I don't get it, I'm making so much more money, and I don't have as much inventory. So yeah, so the very... Short answer to that long blathering I did was, yes, it is easily possible to have too much inventory.
Mallory
So when we're talking about inventory, is it, and maybe it's both, is it like the finished products that we're selling? Is it the materials that are going into those products for like, you know, you spoke about working with needle arts and I know you have a background in knitting. So is it like craft supplies and the materials that are going into those finished goods too?
Gwen Bortner - Everyday Effectiveness
Well, you know, and so to be completely honest, most of the people I work with are in the retail side. So they're selling a finished product. But I also have a number of clients who were doing small business manufacturing, which may be a little beyond where a lot of your audience is more in the maker category. But really, they're doing small business manufacturing as well. And what I find is it's a mix of both. Right?
It's a mix of having too much finished product and either having too much of some raw materials and not enough of others, but it's really about the right sizing of it. So it's not as much about too much or too little, it's really about, are you right sizing your inventory, whether it's the raw goods piece of it that you're using to create, you know, whatever your product is that you're creating, or is it the finished product sitting on the shelves based on, you know, what your model looks like, so.
Mallory
So how do you figure out what the right size is then?
Gwen Bortner - Everyday Effectiveness
So this is truer for finished product than for raw material. So let me just be clear on that. So we're going to start with finished product because it's an easier piece.
Generally, for anybody in the kind of maker space, we fall into what is called specialty retail, that we're selling something out. And I say retail, it can also be wholesale, but it's still that same space.
The guideline is you want to be having somewhere between two and six turns of your inventory per year. Now we're starting to get into jargon and people, I'm sure there's at least someone that's listening to this whose eyes just roll to the back of their head. And so we're going to take it down, we're going to make it really simple.
So a turn, an inventory turn is the theoretical number of times that your total inventory value gets sold in a year. I'm going to keep it really simple numbers for a moment.
So like if you've got a thousand dollars of inventory sitting on your shelves, in whatever theoretical shelves you have, and that's kind of the average that you're doing most of the time, that means that you should be selling two thousand dollars of that inventory a year. That would be two turns. If you were selling 6,000 that would be six turns, right? Because it's 1,000 times six, right? 1,000 times two.
And so the way to figure out what is the right level is to work that number backwards. To say what are your average sales per year. So picking a number just another number out of random. Let's say your average annual sales is ten thousand dollars.
For specialty sales, particularly in the maker market, really if you can get to two or three, you're usually doing really well. This is particularly in the retail side of it. But somewhere between two, two and four is where you really wanna be shooting for. If you can start getting above four, you're often having to make too much or spend too much on shipping and there's other downfalls, but somewhere in there.
So you're gonna take your total sales for a year, and you're going to divide it by whatever turn number you want.
So if we take 10,000 and we say we want four turns, we're going to take 10,000 and divide it by four. That means that your average inventory value that's sitting on your shelf should be 2,500 at any point in time. Does that make sense? Was it simple enough? Do you think? And this is not the super accurate way to do inventory turns, but it's the relatively easy, I can do the math in my head. I don't have to spend hours, you know, gathering numbers to try and figure out, you know, what I'm doing way to, you know, and if you're getting close to that, then you're in good shape.
Mallory
Yeah, it kind of the turns thing kind of reminds me of like within restaurants...
For example, I was at a pizza restaurant last week and on a busy Friday night with my best friend. And we were sitting at the table and the waitress kind of forgot about us towards the end. And like, I was fine. We were having a good time. But they weren't able to turn that table. I'm pretty sure there were people waiting outside that if they were able to get us checked out and out of there, they could be making more money on next guests.
Gwen Bortner - Everyday Effectiveness
Yes. That is exactly the same concept and where the table is an inventory in a restaurant because only one group of people can be sitting at it at a time, it's the exact same thing.
Every dollar of inventory sitting on your shelf is exactly that. It's like a dollar that's sitting there and how many times can you sell it to make more money? Right? And you're sitting there as a dollar, as a cost, but your value of it is $2, because that's what you're gonna sell it for if you're doing just a kind of standard keystone market. And so how many times can you do that in a year?
I will tell you in the retail world, in the craft market, and this is typically more brick and mortar, but it also applies to online businesses. What I typically find when people do the numbers is it's usually one or less.
that when they start working with me, they're only getting one or less than one turn per year. And it's like, yeah, you need to cut your inventory in half. Which of course is a very scary thing. Because most people believe more inventory creates more sales, but that's not actually a true statement.
Mallory
Yeah, and when you're talking about retail, specifically with like independent boutiques and things like that, there's something called open to buy, right? This is related to what you're talking about?
Gwen Bortner - Everyday Effectiveness
Yes. So the open to buy is a way to help manage how much money you're actually spending on inventory. Because almost everybody that's in any sort of maker environment is in it because they love the thing. There is no like just hardcore business person that says, I wanna open a yarn shop because it's gonna make me lots of money.
That is not the way this works. We all know that, right? That is just not how this is. We love knitting, we love yarn, or we love woodworking, and we love the process of building something. Doesn't matter what it is. It's all about the passion and the excitement for it. And so we get excited about the products, and if we don't have a way to manage how much we're spending, it's really easy to spend a lot of money on stuff because...
It's fun. We love it. It's exciting. It's all those things, right?
So the open to buy is a way to manage that. And the idea is however much money got for the product that you just sold. And I'm going to use a simple keystone situation, right? So we sell the product retail for 10. It cost us five to bring it in. You know, like I said, oversimplifying, but we're, you know, so we can keep the numbers in our head, right?
So if we're selling a product for 10, but it's costing us five, if we sell $100 of that product, that meant that we probably spent $50 of cost on it, right? And so the idea is you then now have $50 to replace that product, not 100, right? You have 50.
Now, if you're needing to decrease your inventory, which most people are, what I encourage you to do is not say, I've got $50 to replace, but you only do a smaller percentage of it. Okay?
So for instance, if your cost of goods is 50%, which is our example there, right? 50% of 100 is, well, 50. Maybe you say, I'm only going to allocate 45% to replacing inventory. And so over time, you start decreasing it gently without doing a big sale where you're losing money. It happens over time, way less painful. And you're not seeing this huge change in your business model so aggressively that it becomes problematic.
If you need to do it a little more, a little bit faster, then maybe we say we only take 40% of our cost to put toward open to buy. But the way I find that's the easiest way to do it is to set up a separate account, a completely separate checking account, bank account, savings account, whatever you want. Generally, I'd recommend some sort of checking account where money can come in and out pretty easily. Every time that you're making a sale, either daily or once a week or whatever, you look at your total sales and you say: "We sold X amount," and so we're going to move X percentage over to this account.
It doesn't mean I get to spend it every day. I need to know how much money is in here. But by putting it in a separate account, it makes it so much easier to track and say, "Oh, I've got $40 I can spend." And then when you spend it, you're still going through that same process, like I said, daily or weekly, whatever actually makes sense.
Mallory
Okay, so we've talked about, okay, so inventory management for retail shops and inventory management for like makers and artists who are possibly creating products for those independent retail shops.
I'm curious, I have another video about how to get started selling to those boutique retail shops as an artist, right? And I know, you know, there's different ways that that's often handled, especially in small independent stores.
There's wholesale, which is kind of a lot of what we've been talking about, but there's also consignment. And I'm curious from both a maker artist perspective and a retail shop perspective, maybe you could kind of talk through some of the pros and cons of that as it relates to inventory management.
Gwen Bortner - Everyday Effectiveness
So there's pros and cons on both sides, which I love that you're aware of. A lot of people are just like, oh, you've got to do this. And it's like, no, they're different answers for different people, right?
So as the maker, getting your product into the retail shop, it's technically better for you most of the time if you can have them buy it wholesale.
Now here's the downside, typically wholesale, they're gonna pay you less than if they're doing it consignment. But the thing is, when it's sold, it's sold. It's never coming back. It's their problem, as it were, to make sure that it gets sold at that point.
And so a lot of folks shy away from wholesale because it's like, but I make more in consignment. But you may or may not make more depending if or if not it sells, right?
So there's an upside to doing the wholesale. The downside is exactly that. Typically, where wholesale, and I'm using really generic numbers, and I'm not saying this is what has to be, but typically wholesale is 50% of what expected retail is, where consignment can run to 60% or 70% of what retail is. So the maker is making more, but it could sit for two or three or four months before it sells. And when it's sitting in their shop, it's not sitting anywhere else to be sold. So there's only a narrow place.
Now, if you find a shop where your product is turning really consistently, then consignment might be a better option. Almost like it's going wholesale, but you're actually making more money, you know, in the process.
The reason a retail shop likes consignment is because they don't have the obligation to pay you until they've actually made their money, right? So that's, you know, that's, that's the advantage for them. The reason that they like to buy wholesale is because generally the cost is less.
So there's pros and cons in both sides. And I think you have to look at each situation case by case.
Years ago, when I lived in Missouri, there was an art studio that had lots of maker things. And I used to make a little bit of jewelry and a few things that she had on consignment. It wasn't my primary business. It wasn't the primary thing. So it didn't matter to me if it sat there for two or three months before it sold. So it wasn't a big deal. But like 90 plus percent of her product was all consignment. But it allowed her to bring in lots of different artists and be moving things around and have lots of variety, which, in fact, actually made the shop more interesting to people and potentially brought in more customers.
So there's a lot of reason for the various business models and why you might choose one over another. But you really want to look at it with the full picture in mind and not just look at one narrow element of it.
Mallory
Yeah, I think it's so important to understand like the goals and the pros and cons of both because I had one of my members of the Badass Creatives Marketing Accelerator was dealing with a consignment situation where the shop, you know, wasn't turning over her inventory very fast and then they stopped communicating with her and she could have used that inventory for craft shows that she was doing, you know, and eventually she was able to like go get it all back. But it's so important to like understand your own goals when going into that situation.
Gwen Bortner - Everyday Effectiveness
Well, and having an agreement that you both understand ahead of time. So to say, you know, if a product doesn't move in... (I'm making this up. I mean, it can be whatever agreement you want.) But, you know, if a product hasn't moved in three months, you will ship it back at, you know, whatever cost or, you know, whatever the thing is because you may know it's like, well, then it's just the wrong product for this particular shop. Right?
Especially when we're talking about maker, you know, items, because a lot of times they're all pretty,
a fair bit of uniqueness and it's like, hmm, somehow this particular thing doesn't work well in this shop, but this other thing does and allows you to make the switches, right?
Mallory
Yeah. Okay, then one final question related to maker businesses and artists.
I've heard this come up where people wonder, should we be selling pre-made items? Should we be like creating a bunch of inventory upfront? Or should I do custom made, made to order? Like is there one that's better? (Again, it depends, but...)
Gwen Bortner - Everyday Effectiveness
Well, and it's back to what is the overall goal, right?
So the value of making product ahead of time is often you can do it a little more assembly line-like, right? And they're similar in there. And you can do them a little bit faster because it's repetitive. And so therefore, your time investment and their for-profit margin may be a little bit...The time investment is less, so your profit margin is a little bit higher. And if you know it's something that people are buying consistently, then there's also the upside of that, right? That you've always got product that people are looking for.
On the other hand, doing made to order allows you to not invest time and money in product that just sits and never sells. And so there's some upside there. And often you can charge a little bit more for that made to order because it really is, it is customized to the person that they're potentially buying it for. Because they're picking their color, they're picking whatever details that come into it. So there could be an advantage there.
But the downside is, what if you get 100 made to orders all at the exact same time? Because you probably can't fill them in the time frame that you normally want to do. So it's a little bit of looking at both and seeing where does this particular piece fit in, and also how generic the piece is.
So knitting was my primary craft. I would never do knitting stuff as pre-made because there's way too many choices in details and specifics. But the little wire-wrapped base jewelry that I was doing was fine because it was like, you know, a neck is pretty much a neck. You know, earrings are pretty much earrings. They're going to fit most people. They either like them or they don't. You know, it doesn't have quite the same level of chance of working or not working.
So I think that also plays into it. And really... what is your overall business model? What are you looking to do long term?
If you're looking to really build this as a full-time business long term, handmade is probably not unless you're charging really high prices for it so that you can really make it a viable business, which I've seen people do.
Or if you're looking for a longer term business otherwise, you're probably looking about how can I outsource it? How can I do this so it's repeatable? And that typically is more of a pre-made option.
But go back to what is it that you're looking to get out of the business to help really drive that answer.
Mallory
Absolutely. Yeah, it's so important to be in alignment and clear about your own goals and your own business values.
And if somebody needs help with that... (because you're actually my business coach right now and you're amazing and you're so great at like systems and operations and things like inventory management and figuring out how to get in there and like increase your profits and decrease your expenses.) So how can people get in touch with you and find out about how to work with you?
Gwen Bortner - Everyday Effectiveness
So the best way is to jump to my website, which is EverydayEffectiveness.com.
Or people can just reach out via email at Gwen at EverydayEffectiveness.com and say, oh my gosh, I heard you on Mallory's show, and I've got questions.
And I'm always happy to hop on a quick call and figure out, is it the right time to work with me or not? And if there's a quick question, sometimes I can just do that right then and there and help you move on. I've done that more than once as well. And I'm happy to help if I possibly can.
Mallory
Awesome, thanks so much, Gwen.
Gwen Bortner - Everyday Effectiveness
You're welcome. Thanks for having me.