Managing Inventory Down in a Recession

Today I had a long conversation with a very experienced businessman who was under pressure from a supplier.  This individual has had a very successful track record of managing (and making money from) the hospitality industry.

The issue was a pretty simple one as to why pressure was mounting :

• Inventory levels had been managed down slowly, but not swiftly enough to mirror the deteriorating economic climate.  The decision was a simple one - to stop ordering from a key supplier for a few weeks and to run inventory down.
• A new competitor had opened in the vicinity of the main establishment in the immediate past.  This had had the effect of distorting the typical inventory days for a number of product skews.  The opening of this competitor was no shock, and should have been planned for.
• With a tightening economy the number of days inventory was held in various products (skews) had increased.  A conscious effort was made to rebalance the inventory landscape by liquidating this slow moving stock as cost + 5% to allow capital to be freed and higher turnover inventory to be brought in.

The result was that the initially horrendous picture was not bad at all.  It could have been avoided with a little forward planning.

So in a volatile economy manage inventory levels tightly.  It is better to forego a little bit of margin and order more frequently than just let inventory build up - as the financing cost on the holding of slow inventory will equate to the discount given to clear out.

Build Some 'Giving' into your business model

This is a really short one.

Work out how you can build some philanthropy into your business model.  It is not that hard and here are a couple of suggestions :

1. Work out if your business can donate a product / service to a charity auction to support a cause.  Does not cost that much and has a real benefit.
2. See if there is any way you can support / sponsor a charity - even the simplest amounts / efforts can have a substantial effect.
3. Allow employees to spend a day a quarter in a charity.  As a volunteer.

It is not that difficult to assist, and it gives your business a more balanced perspective than simply trying to generate profit.

Executive Pay in Startups

I know this is a hot issue, and one that many will not agree with, but here we go anyway.

Investors get pretty nervous when management teams are paid too much money in really young companies.  Basically because there is a belief that the overpaid emerging company executive should be 'hungry'.  

I often describe it as one pay lever that has 'equity' at one end and 'cash' at the other.  If the lever is pushed toward cash then less equity should be available.  If pulled towards more equity then less cash should be taken.

Any package should be generous, but it is the mix of equity and cash that is critical to get right.

The next issue is how much cash ?  The point I often make is that this can  always change over time - so the first award is not set in stone.  I have seen 2 examples of start ups where investor indigestion has taken place.  

The first was a few years ago when an inexperienced VC, but really successful property developer backed a venture where the CEO was on $500,000 package.  Basically all money that was going into the venture went to the CEO.  The VC became agitated and pushed for unrealistic results on an even more unrealistic timetable.  All very disappointing as both individuals were talented and the business model had real legs.  it all fell apart in my opinion because of the poor initial salary package which was unsustainable.

The second is more recent.  A management team is on a good wicket ($300k packages) and have sought funding.  Investors have pushed back on this as they want money to go into the development of the business - not the hip pockets of the executives running it.  And there is a difference.

In my opinion the right level for executive pay in start up land (depending on size of company) is between $80,000 and $150,000.  This assumes that equity grants will take place as well.

A tough issue, but these are my thoughts.  For the executive the balance needs to be struck between what they will be paid, and how investors will view those pay packets. If the pay packet is seen as off balance then it may have bigger ramifications for funding going forward.