When becoming an entrepreneur it’s really easy to become so bogged down with the details of creating products for your startup, that it’s easy to neglect a lot of the business details. From a lot of entrepreneurs I speak to, it’s incredibly tempting to have the mindset of “If I build it, they will come.”
In other words, “If I post on Twitter exciting news about my product, my target audience will want to buy it!”. This dream like state of financial success is one of the reasons as to why 50% of small businesses fail. Since there’s no structured plan in place to sell your products and services.
One of the first steps towards creating this practicality when creating a plan to create financial success for your startup is to think of your products and services as units. For instance, let’s say your startup is in the business of selling t-shirts. Well, every t-shirt would be one unit.
Next, you will need to have an idea of how many units you can sell in one month.
There are two ways to do this:
The first way is, Let’s say that you are a startup that has been around for some time and you have an established sales history. One of the ways to predict how many units your startup will sell is to look back at how many units (or t-shirts) your startup sells on average in a given month. This is average is what is known as your forecast. A forecast is essentially a numerical sales goal for your business. It enables you to foresee potential sales that ultimately lead to your overall goal of making a profit.
Now you may be wondering, “Well I’m a new startup and I have no sales history for my products and services!” In this case, what you would do is look at similar products in your industry and startup niche and then create a forecast based upon this.
For instance, perhaps your business sells consultations. A great way to get a feel of how many consultations you can sell is to look at other business who offer similar style consultations to the kinds your business intends to offer. From here, you can at least have a starting point to the amount of consultations you think your startup is able to sell.
Keep in mind as your business grows you can always tweak this forecast as time goes on. For instance, perhaps your business is doing better that competing startups in your niche industry. In this instance you would increase your forecast number.
For example, Your business (startup X) sells twice as many consultations a month than your competitor (startup Y). In contrast, startup Y sells only 15 consultations and your business (startup x) sells 30. Now you know to adjust your forecast to 30 units each month instead of the 15 units your competitor was selling monthly.
Now, you may be asking yourself what if I set the wrong forecast for the number of units I think my business can sell? The answer to this dilemma is what is known as safety stock. Safety stock is a numerical number just as a forecast is and it acts as a buffer in case your forecast is too low or too high.
Confused? Let’s make it simple. Let’s say your television broke and you are trying to find another one. You walk into the electronics department and have a budget for the amount of money that you would like to spend on purchasing a new television.
Let’s your price range is $300. This would be your forecast in a sense because you’re predicting and setting a numerical value on how much you think your new television will cost.
So, you’re looking around the store and find a television that immediately catches your eye. It’s HD and everything. Problem is, this TV is $600. $300 more than what your budget is. If you were smart, you could account for this unexpected inkling by bringing extra money to accommodate for the unexpected.
In business, your safety stock is the amount of units that you have onhand in case your business sells way more than what was forecast.
Let’s break this down. Let’s say your business regularly sells 30 consultations each month and have been for the past 2 years. However, all of a sudden, your business takes off and you appear on the Today Show and suddenly everyone wants to sign up for a consultation. However, only problem is, you haven’t forecast the amount of consultations you are now able to sell given the fact that you haven’t planned the time to consult for so many hours.
Back when your business was selling only 30 consultations you made other commitments like volunteering for the PTA, maybe even started a side gig, etc. Well, suddenly now that you’re famous and you haven’t allotted the time to take on the growing number of consultations.
In going back to my T-shirt example from before, let’s say that your startup forecast the number of t-shirts your business would sell monthly. So you design only that forecast amount and no extras. Then, your business picks up and more people want to buy your product. Problem is, you haven’t designed enough t-shirts to accommodate this rising demand. Therefore, your business is losing sales because you don’t have enough product.
A way around this is to set an average forecast, but to have some wiggle room. A great trick to set your safety stock is to double your average daily sales. For instance, if your business sells 30 t-shirts daily and is seeing consistent sales, setting your safety stock at around 50-60, is a smart strategy to meet demand.
However, it’s important to not only avoid setting your safety stock too low but to avoid setting it too high. The reason you don’t want it too high is because you don’t want to pour in your startup’s resources into creating product that will not sell. This creates overstock inventory. The enemy to making profits for your business and being able to break even.