Why Many Small Businesses Fail - Poor Inventory Management

Since the U.S. Small Business Administration is working to stimulate the creation of new small businesses by increasing the percentage of the gaurantee to 90% and to reducing the fees, it is a good time to reevaluate the high failure rate of small businesses. According to SCORE, using data from the SBA, there were 637,100 new businesses, 560,300 business closures and 28,322 bankruptcies in 2007. Of these businesses:

• Two-thirds of new employer firms survive at least two years,
• 44 percent survive at least four years, and
• 31 percent survive at least seven years.

What is striking is that these findings do not differ greatly across industry sectors. In his book Small Business Management, Michael Ames gives the following reasons for small business failure :

1. Lack of experience
2. Insufficient capital (money)
3. Poor location
4. Poor inventory management
5. Over-investment in fixed assets
6. Poor credit arrangements
7. Personal use of business funds
8. Unexpected growth
   

This blog highlights poor inventory management as a cause for business failure. Between the lack of experience and the access to appropriate tools and technology, small businesses have not been able to make smart inventory management decisions.

For example, QuickBooks, one of the most popular software packages for small businesses to manage finances and inventory, can help determine how much inventory a business has on hand and when it's time to reorder, but it does not provide the intelligence to help businesses decide how much to keep around so they neither run out nor keep so much that it's not cost effective. In other words, the inventory capability provided, while providing a great start in establishing accurate records..., the existing tool relies on manual settings of inventory levels. When combined with lack of experience, this often results in poor inventory management.

Kathy Yakal of PCMAG highlights how small businesses use a new QuickBooks adjunct to not only manage their inventory but optimize their inventory at peak financial performance. Kathy Yakal notes that of the many QuickBooks add-ons that help with administrative inventory tasks, Phitch OC 9.0 is the only one that actually helps optimize inventory at maximum economic profit. Economic profit, which is a measurement of the economic value of an investment, can better weigh the complex tradeoffs involved with purchasing inventory.

So what does this mean for the small businesses? "By maintaining optimum inventory levels and order quantities, Phitch OC 9.0 may readily reveal a 15% improvement in economic profit over the conventional methods, providing businesses with hundreds of thousands if not millions of dollars in real and measurable benefits by simply changing the rhythm of when and how much inventory they order," says John Krech, President and founder of ePhiphony Incorporated.

In other words, not only does Phitch OC 9.0 provide the wisdom to not only manage inventory but to optimize it at peak financial performance, but it provides a much needed stimulus by revealing wealth that is needlessly tied up inventory that can be better utilized to help a small business survive those first critical years.

A new magic formula - could it lead to the rebirth of software consulting

Daryl Mather of Consulting Pulse has appropriately pointed out the dealth of software consulting due the loss of the magic formula: scarcity and value (http://tinyurl.com/dj68pr). With the economy desperately seeking a stimulus, the industry is poised for an innovation that could be the rebirth of the industry.

While ERP solutions are abundant, they are using analytical methods developed in 1913 to minimize variable costs. Inventory is one of the largest investments made by most businesses yet the decision strategies utilized have gone unchanged for essently 95 years. An opportunity to make over the business models employed is beyond ripe.

Paul Brown of the New York Times recently stressed "in tough times, nothing is more important than making sure enough money is flowing in" (http://tinyurl.com/cgpazp) It is time to utilize a balanced strategy that weighs both cost and cash in today's ERP systems. "Economic profit, also known as Economic Value Added or EVA, is just the metric to weigh the complex decisions involved with inventory from an investment perspective", says John Krech, President ePhiphony Incorporated.

Dick Johnson of IR Cafe recently discussed EVA in his blog (http://tinyurl.com/atlfal ) and highlights that "other metrics like free cash flow and even return on capital can create perverse incentives for managers". While companies using EVA as a performance metric have outperformed their competition by an average of 49% (Stern, J.M. 2003. The EVA Challenge: Implementing Value-Added Change in an Organization. John Wiley & Sons), it has not been utilized as a metric to manage inventory. That is until 2008 - with the release of ePhiphony Incorporated's patent pending solution - Phitch OC 9.0.

Kathy Yakal of The Progressive Accountant recently covered Phitch OC 9.0 as a tool for consultants to help clients to optimize inventory (http://tinyurl.com/afjx5y). Kathy stresses that "there’s only one adjunct QuickBooks program that accomplishes such a feat ....in order to optimize your company's investment in inventory".

"Consultant's now have a unique tool that is the only one of it's kind that provides value by generating a report to demonstrate the change in economic profit" says Krech. At a time when only of 37% consumers consider software company claims to be very or even somewhat believable (Rosen, E. 2000. The Anatomy of Buzz. DoubleDay), ePhiphony delivers it's mantra to reveal hidden wealth.

In addition to providing a magic formula for the consumer, the formula must also apply to the consultant. The old ERP model is built on increasingly complex systems that take a huge effort to implement and are often over budget and fail to deliver expectations. The old formula has been motivated to reward extensive requirements for installation and training.

For example, Oliver Marks of Future Changes recently stressed that "when a software company sets up a consulting operation, it’s serving its own self-interest...." (http://tinyurl.com/cgpazp). In other words, vendors have been motivated to escalate service requirements and expenses. In another example, Gene Marks of Business Week highlights that "vendors seem to go out of their way to make learning to use their applications overcomplicated and expensive" http://tinyurl.com/crwnz2.

"What is needed is formula that is designed from a green perspective in that it leverages existing systems, that can be implemented quickly and effectively. ePhiphony Incorporated specializes in developing ERP compatible software. Phitch OC 9.0 is compatible with QuickBooks Premier and QuickBooks Enterprise and we are working on Versions MicroSoft Dynamics and SAP.", say Krech. "Our model is to design software that can be installed and implemented in a number of hours - not days, weeks, or months. We want consultants to implement their sales cycle quickly but return on an annual basis to implement continuous improvement and added features at an exception value".

Consultants for ePhiphony receive commission for each year that a license is active; however, each year is based on bringing continued value. $1,597 per user buys you the first year’s license, and year two costs $377 per user. A free trial is available, as is a weekly Webinar -- visit the site for details. A combination of a short sales cycle, continuous value, and continuous revenue is a formula for success for consultants.

The Progressive Accountant covers inventory optimization in QuickBooks

The following is a copy of Kathy Yakal's coverage of inventory optimization in The Progressive Accountant. Click on the link to read the article by Kathy Yakal of The Progressive Accountant, which is a brand of Progressive Media Group and is dedicated to providing the information, insight and analysis that business executives need to succeed. Article link

Title: Help Your Client Optimize Their Inventory: Phitch OC 9.0
Written by Kathy Yakal
Monday, 09 March 2009 01:25

There are plenty of QuickBooks add-ons that help your clients manage their inventory, but wouldn’t it be nice if they could optimize it, maintaining an inventory balance that maximizes economic profit?

There’s only one adjunct QuickBooks program that accomplishes such a feat. Phitch 9.0, from ePhiphony Incorporated, uses patent pending technology to determine inventory alerts, reorder points, safety stocks, and order quantities at your point of maximum economic profit, in order to optimize your company's investment in inventory.

Phitch works with QuickBooks Premiere and Enterprise, and founder John Krech is working on versions for SAP and Microsoft Dynamics. Setup and integration are easy, as is regular use; color-coded flags indicate when inventory needs attention.$1,597 per user buys you the first year’s license, and year two costs $377 per user. A free trial is available, as is a weekly Webinar -- visit the site for details.

About the Author:

Kathy Yakal has been writing about personal and business technology since 1983, as an editor and writer at COMPUTE! Publications. She writes frequently for The Progressive Accountant on technology topics.