Stage 2 – Business Fundamentals for a Small Business
The baby is crying, the husband is hungry, your garage has no room for any more inventory, your phone is ringing from your boss at your day job, and your customer email inbox is overflowing.
You are stressed out and trying to figure out what to do next.
For a stage two eCommerce business, these feelings are common. At this stage, inventory management’s importance is becoming more evident, but so are marketing, sales, customer service, and accounting. You may have begun a prioritization process, but it’s not working the best it could.
By reviewing business fundamentals at this stage, you are ensuring you prioritize the right things and refresh yourself on positive, healthy business habits.
It is essential to focus on the three cornerstones of business to continue scaling your business, people, process, and technology. We break out our fundamentals of each stage of business by referring to these cornerstones. When in balance with each other, these three realms create a successful and scalable business.
In this first dimension of process, stage two businesses typically focus on finding a prioritization method that works without spending a ton of money. You are tight on funds and often are beginning to look at the buying, selling, and storage processes to see what is worth keeping and what you can scale back.
At this stage, you have established you are an LLC, you have invested in the legal safety nets that your company may need, and you are now ready to look more closely at your contracts.
Your contracts provide an opportunity to negotiate or move elsewhere.
When assessing your contracts with your vendors and/or storage companies, we recommend starting with identifying your most significant needs. Do you want the lowest shipping prices? Better payment terms? Can you upgrade your quality of service at a lower rate somewhere else? By asking these questions, you are starting to identify what you care most about in your contracts. Answering these questions will guide your negotiations. Negotiations should begin with written terms and well thought out strategy. You can read more about the art of negotiating with your vendors and warehouse suppliers here.
SOURCING: Purchase Orders and When do I order More??
When you are buying your products from your vendors, are you sending a Purchase Order? Are you receiving a packing slip upon receiving your inventory? Purchase orders and sales orders are both legally binding documents used in accounting. They clarify the intent on the buyer’s and seller’s side before payment of the invoice.
Buyers send purchase orders to the supplier. They contain information on which product(s) you ordered, the number of products you ordered, and the prices.
Suppliers send sales orders to the customer once they place an order. They contain the same information that the purchase orders do. Still, it is a confirmation that the supplier will be able to fulfill your order based on quantity, payment terms, and delivery site.
Commonly people think that sales orders and invoices are the same. Sales Orders are different from invoices. Invoices are the formal and legal framework upon which dictate payment. Sales orders allow confirmation that you will receive all you ordered and that your order was received. Sales orders allow you a chance to double-check your order and prepare in advance for the payment amount. Additionally, you will want to receive a packing slip or Bill of Lading with your sales order. Packing slips are for confirming the physical receipt of inventory quantities on the receiving dock in the warehouse when they arrive.
Creating a process around sourcing your materials with sales orders and purchase orders allow you to visibly confirm when and how much of the products you ordered. Often this enables you to gauge when your reorder points will be, thus leaving little room for the dreaded “out-of-stock” status.
We all dread the out of stock status. With the kids, husband, the day job, and keeping up with your product’s sales, you may be encountering out of stock statuses more than you or your customers would like. These statuses will eventually harm your business as your clients become less loyal to your brand and start searching elsewhere for the product they need.
To avoid out of stock statuses on your inventory, you must know how and why they occur. Out of stock statues happen when there is :
Increase in market demand
Most Stage 2 businesses don’t have time to treat many of the leading causes, so we talk about this more in Stage 3.
If you are not having as many out of stock statuses, you are undoubtedly looking at beefing up your sales processes and tools. You may have been throwing things at the wall, hoping some of your sales techniques will work. It is time to look and measure what sales processes are growing your business. We recommend starting with these three questions:
Are you hitting your target audience?
Is there one sales platform that is outdoing the others?
Who are your competitors?
It’s okay if you don’t have it all figured out in Stage 2. Most Companies evolve in their marketing programs a lot between stage 1 and stage 5.
Stage 2 businesses are in the process of outsourcing their storage, or they have already done so. There are a lot of options for warehousing your products. We talk about these options in our Stage 1 article.
Suppose you have already located your warehousing. Its time we talk about healthy warehousing practices. All warehouse practices are not the same, but there are several practices that every warehouse should be doing. We know that warehouses pick, pack and ship your products, but they also should be receiving and putting away your product and dispatching the order and handling returns as needed. Also, value-adding is something that you may need to look for in a warehouse if you are an eCommerce business that sells kits or to-be assembled products.
At this stage, you are paying attention to your sales and purchase orders. You also should be paying attention to your COGS, as discussed in Stage 1. Now it is time to start reconciling and tracking your inventory.
The common misconception in accounting for inventory is that reconciliations can happen at any part of the sales cycle. The truth is, you shouldn’t wait too long to reconcile, but you should also not reconcile immediately. So when is that sweet spot?
When we check in with accountants of stage 2 businesses, we find that they often write inventory off as a business expense immediately after selling it. It is a common mistake made by many accountants and business owners. Writing off expenses at an appropriate time prevents oversights and messy books when/ if that product is returned. It is best to wait a week after the product sells to reconcile the transactions with your sales orders and purchased orders.
As your business grows, it is vital to keep growing your team of people who will assist you in your day to day operations. By hiring people, you can put energy into the parts of the business that need it the most. In stage two, you may still be a large part of your day to day operations. You may have just started the hiring process with an assistant and/or accountant. So, where is it appropriate to be delegating some of the duties? While you may know your business best, there are a few recommendations that can help guide you to where you could be seeking extra support.
Sourcing is to stay with the owner. At this stage, you are maintaining the relationship with the vendors and managing the actual purchase orders.
Delegate the most tedious tasks first, including things like formatting webpages or publishing blogs. By delegating these tasks, you will need additional support around marketing and sales.
Warehouse- Your storage operations are crucial to keeping customers coming back. You have a team working with you and for you to make this happen.
Technology is an integral part of our life. Because our day to day life is inundated with technology platforms to assist us, many business owners think integrating multiple technologies as soon as possible will do the same. Although technology platforms do help us in the most efficient way possible from time to time, knowing where to put your time and energy will improve the overall budget.
Right now, you are still sourcing via phone or telephone. The thought to automate this process may have crossed your mind. We are here to reinforce that automation of product supply is something that we suggest once your company has hit stage 6 or more. Automation of inventory buying leaves lots of business controls in the hands of a computer who may not have all the manual data and foresight into the business financials. As you progress into a larger-scale company, this will remain important to continue a healthy and easeful relationship with your vendors.
Automation of inventory doesn’t even matter if you don’t have a strong sales force. Where are your marketing efforts being placed? Are they working? You had most likely invested in several marketing technologies that all should have worked, but you see that is not the case. Now is the time to hone where technology is working for you and identifying the ones that are working against you.
By now, you have had to move out of your garage or basement. Hopefully, you have found a warehouse that meets your business needs, but do you know the technologies they are using to optimize their processes? Could you find other warehouses that are more efficient? Warehouse management systems differ from one software to another. Questions you should be asking your warehouse about there warehouse management systems are:
Will the orders be sent automatically to the warehouse, or do I have to place them manually?
How is counting inventory managed? Can they be split into cycle counts?
Do the inventory counts automatically sync with the core inventory levels?
Can picking routes be optimized based on product location?
These are only a few questions you should consider when assessing your warehouse’s management system. We encourage you to read supplychain47’s article on warehouse management system questions here.
Lastly, your accounting management system is a piece of technology that is important. At this stage of business, moving from spreadsheets to an online accounting system is probably best. You will also be looking for some help with keeping the books. We have some experts in QBO and Xero, but they might be out of your current price range. Consider a part-time bookkeeper instead and use our resources as teams to learn more. We recommend looking at LedgerGurus and CatchingClouds.
Overall, Step 2 is a whirlwind sprint from year 1 of business to year 2. For most eCommerce companies, this stage corresponds with revenues over 100k but less than 1 million. Either way, the emotional journey is nearly identical to stage one. You will be finding out what works better in marketing and learn to prioritize your other tasks, so they don’t fall behind.