• VAT (Value-Added Tax) is a consumption tax applied at each stage of the supply chain, where value is added to a product or service. 
• A VAT number is a unique identifier required for businesses in countries with VAT systems. These numbers enable businesses to charge, collect, and reclaim VAT.
• Businesses operating in VAT-collecting countries may need to register based on turnover thresholds, imports, or the type of goods/services offered, including digital products.
• Unlike a sales tax, businesses collect VAT at every stage of production and allow them to reclaim VAT on purchases.
• Not only does a VAT number ensure your business is compliant, but it also enhances your credibility. VAT numbers also make it possible for businesses to reclaim VATs paid, which will reduce their tax burden.
• Over 170 countries, including the EU, Canada, and Australia, use VAT systems with varying rates and regulations.
• The average VAT rate is 21.6%. Some countries apply rates as high as 25% and others as low as 5%. 

Most businesses operate with a central goal: to make money. But growing revenue isn’t easy, especially when you’re confined to a specific region. After all, you can only convert so many people locally before your sales eventually reach a plateau. A common way to overcome this hurdle is by expanding your operations across international borders.

While international business can be a powerful way to boost your reach and revenue, it comes with a slew of complications to consider. One significant aspect is compliance with international tax laws, including obtaining a VAT (Value-Added Tax) number. So, what is a VAT number? Why might your business need one? And how does it differ from other tax identification numbers?

What is a VAT number?

If you’re a business, particularly in the EU, looking to sell your goods across borders, you’ll need to know what a VAT ID is. A value-added tax identification (VAT) is an identifier businesses use for tax purposes in countries that collect Value-Added Tax. It allows businesses to charge, collect, and remit VATs to the relevant tax authorities.

VAT numbers are commonly required in the European Union (EU) and many other countries where VAT is a standard tax. VAT IDs can consist of up to twelve characters and can contain both numbers and letters. Many countries will have their own suffix to make identification easier, for instance, DE for Germany and FR for France.  

This is distinctly different from a country like the US, which does not have a VAT system. Instead, they use a sales tax system, and businesses use identifiers like the Employer Identification Number (EIN). Other countries, such as India, use a Goods and Services Tax Identification Number (GSTIN). This number serves a similar purpose as a VAT number. 

What is a Value-Added Tax?

As we mentioned above, VAT number stands for value-added tax number. Some also refer to it as a value-added tax identification number. It’s a consumption tax that VAT nations apply at each stage of the supply chain where value is added to a product or service.

Unlike a sales tax, which is only collected on the final sale of a product, VATs are collected throughout every stage of production and distribution. However, you only add VAT on the value added at each stage, not the entire transaction value.

For example, let’s say you’re a manufacturer out of the UK, and one of your wholesale clients is from Portugal. When you make a sale to that client you would charge VAT on the sale. The wholesaler would then be able to reclaim the VAT paid on that sale once they sell the goods to a retailer, and the retailer can reclaim the VAT once sold to the consumer. While each member of the supply chain pays the tax, the end tax burden ultimately falls on the consumer. 

The overall goal of VAT is to increase a country’s tax revenue without unfairly taxing higher income individuals. The system aims to tax consumption rather than income, which means people contribute based on their spending habits. 

What countries collect VAT?

At the time of writing, more than 170 countries currently collect VAT. This includes most countries that are part of the EU, Canada (where it’s combined with GST in some provinces), and Australia. Though their individual collection numbers tend to differ, the average VAT is 21.6%, but these rates can vary wildly from country to country.

For instance, Germany applies a VAT of 19% while Sweden adds 25%, and some countries such as Canada have rates as low as 5%. Comparatively, the average combined state and local sales taxes in the US come in at just over 6%.

Does your business need a VAT number?

The idea that only large companies need a VAT number is a common misconception. In truth, if your business operates in a VAT-collecting country, you may need to register for a VAT number, depending on the country’s regulations.

For example, in the UK, businesses only require registration past a certain annual turnover threshold. Some EU countries even have a tax relief scheme for businesses with low turnover, exempting them from VAT payments while still requiring registration.

Something important to note is that Value-Added Tax doesn’t only apply to physical goods. You’ll also need to factor it in for any services, such as digital products or consulting. Therefore, businesses that offer these services across borders may also need to register for a VAT number. 

While the general rules and regulations of VAT are similar across borders, each country’s process tends to differ slightly. Remember, this is a legal obligation. It’s important to remain in compliance, especially if you’re a foreigner doing business across borders. 

An often overlooked part of having a VAT number is that it’s a sign of trust. Operating across borders requires building and maintaining relationships with the locals in order to maintain supply lines. Not having a VAT number is the first sign that something might be amiss, and it may prove a hindrance. Even if you don’t strictly need a VAT number, it may be best to register for one anyway.

How do you register for a VAT number?

The process of registering for a VAT number varies from country to country but generally follows a similar structure. Here are some of the typical steps you would need to take when applying for a VAT ID number:

1. Determine the appropriate tax authority: Each country has its own regulatory body for VAT. For example, the UK uses HM Revenue and Customs (HMRC), while Ireland uses the Revenue Online Service (ROS).
2. Gather Required Documentation: This may include a national insurance number, a unique taxpayer reference (UTR), and detailed business data such as revenue, turnover, and projected revenue.
3. Complete the Registration Process: Depending on the country, you may be able to register online, via post, or through an authorized agent. However you choose to apply, ensure you submit all required documents accurately to avoid delays.

Keep in mind that VAT is a requirement regardless of whether you have a VAT number or not. If you register late, you’ll need to go back through your records and retroactively pay the total you owe, including any penalties you may have incurred.

How inFlow Inventory Can Help with VATs

Adhering to VAT compliance is no easy feat. But luckily our software inFlow can make it much more manageable. inFlow streamlines your inventory management processes while helping you track and organize tax requirements like VAT. With inFlow, you can:

• Automatically calculate VAT on transactions.
• Easily generate tax-inclusive pricing schemes on sales orders.
• Save a specific taxing scheme and pricing scheme to a customer record.
• Manage multi-country inventory and tax reporting with ease.

Additionally, inFlow has everything you would expect from a complete inventory management system, including barcodes, reorder points, and real-time inventory tracking.

Conclusion

If your business operates out of the EU or any of the other 170 VAT countries, obtaining a VAT number is essential. Whether you’re selling physical goods or offering digital services, understanding VAT regulations is key to not only avoiding penalties but also building trust in international markets. While the process can seem daunting initially, you can start in no time with just a bit of research and preparation.

The post How to Manage VAT Numbers for International Businesses appeared first on inFlow Inventory.

• Construction procurement is a strategic process focused on long-term goals like supplier/vendor relationship management and involves sourcing materials and specialized labor.
• Procurement in construction is crucial because projects rely on a steady supply of labor and materials. Effective construction procurement will help businesses manage fluctuating costs supplier shortages, and avoid delays.
• Smaller construction companies often face resource constraints, including limited cash flow and smaller procurement teams, which can hinder their ability to secure reliable suppliers.
• Key procurement steps include identifying needs, evaluating suppliers, requesting quotes, negotiating terms, and issuing purchase orders while maintaining clear documentation like requisitions and contracts.
• Some best practices for efficient procurement in construction include building strong supplier relationships, leveraging accurate demand forecasts, and using specialized inventory and procurement software.
• The procurement process involves suppliers (raw materials), vendors (finished products/services), contractors (skilled labor), and project stakeholders (clients), all of whom play distinct roles in project success.

Few industries operate on the scale of construction. Part of that has to do with the physical size of their projects, as well as how broad the construction industry is. However, another part of it has to do with construction procurement or how construction companies obtain the necessary components to do business. 

Today we’ll be going over construction procurement, how it differs from regular purchases, and what it means for construction businesses of all sizes. 

Procurement in construction vs purchasing: what’s the difference?

It’s easy to mistake procurement and purchasing for being one and the same. After all, the two practically share definitions. However, the differences between construction procurement and purchasing are important. 

One significant difference between purchasing and procurement is the goal. Usually, businesses purchase something to solve an immediate problem, such as a lack of inventory. It can also be a problem unrelated to sales, such as emergency repairs for the warehouse or offices. 

Procurement is a more strategic process. It generally has more to do with long-term goals, such as selecting suppliers and managing relationships with those suppliers. Effectively managing these relationships will require someone with a specific skill set and experience in procurement. 

However, procurement in construction extends beyond just materials and can also involve sourcing specialized labor. We’ll go into more detail on this below.  

Why is construction procurement important?

Construction businesses rely on maintaining a steady supply of both labor and materials to deliver projects on time. Procurement is a crucial piece of maintaining a consistent workflow. This is due to a few factors. 

Construction projects are naturally large-scale, expensive endeavors. For example, the average cost to build a house in my area is $320,000 to $600,000. Not only are they expensive, but they also take time to complete. Building a relatively small project, like a house, can take weeks, months, or even years. What does this mean for construction procurement?

First and foremost, construction material costs fluctuate regularly, and considering that construction projects require so many materials, even slight price differences can lead to hundreds or thousands of dollars. And because of the extended timeframes, construction projects are often susceptible to multiple fluctuations. 

Another common issue is supplier shortages. Construction requires a broad range of materials, many of which are both high demand and subject to seasonal market shifts. Sourcing these materials is detrimental to finishing on schedule. However, finding multiple reliable suppliers can be difficult and will take time. 

Poor inventory management is another common mistake that can be disastrous. An inadequate tracking system means you have the potential to run out of a key component at a critical moment. In the worst-case scenario, this could throw off the timeframe for the entire project.

Lastly, logistical inefficiencies can have a cascading effect. Shipping delays and other complications are common. If every shipment is a day late, that adds up to a lot of lost working time. 

Unique challenges faced by small businesses

In 2023, the U.S. Small Business Administration reported 33.3 million small businesses in the US, making up 99.9% of all US businesses. There are challenges to maintaining any business, but the construction industry poses unique ones for smaller businesses.

For one, they tend to operate with fewer resources at their disposal. This can include materials, tools, workforce, and storage space. And, of course, there are reduced cash flows to consider. When you operate with a smaller safety net, it can be easy to fall into the red zone and incur losses. 

Smaller organizations also tend to have smaller teams dedicated to construction procurement. This might not seem like a big deal, but finding suppliers takes time. Having more staff dedicated to finding them is often worth the extra cost, but not every company can afford it. 

What does the construction procurement process look like?

Depending on the project, procurement in construction may follow different steps. Some materials may require special permits or labor, and those introduce additional bullet points. Generally, though, you can expect the process to look something like this. 

• Identify needs – Before purchasing anything, it’s essential to determine what the project requires. In construction procurement, this often means figuring out the necessary material quantities, but it also refers to sourcing different types of contractors. There’s a lot that goes into constructing a building, after all. 
• Write purchase requisition – Once the numbers are final, it’s time to write a purchase requisition. Some small businesses may be tempted to skip this step, but keeping a paper trail is important. It often becomes necessary somewhere else in the process. 
• Evaluate suppliers – Many suppliers offer similar goods, but they may differ in price, as well as other aspects like quality. There are also reliability and lead times to consider. Even if one supplier looks like the perfect partner, it’s best to shortlist a few. 
• Request quotes – Next, it’s time to make contact. Get in touch, and ask for a quote regarding the on-hand project. As we said above, it’s best to contact more than one. Some vendors may be unavailable, or limited in how much they can offer. 
• Negotiate terms and write a contract – Afterwards, you’ll need to negotiate a price. Even if the vendor states one price, they may be able to offer better deals for bulk purchases. A contract is also vital to protect both parties and maintain a paper trail.
• Issue purchase orders and manage purchases – Once all relevant parties agree, it’s time to purchase! Once it arrives, that’s it– it’s your responsibility now. You’ll need to store it and maintain the supply on your own. 

Construction procurement best practices

Keep in mind that a large part of construction procurement is managing relations. A supplier’s prices may increase, or they could find themselves in a shortage, but these things happen. It doesn’t mean you should cut ties and find a new supplier. Shortages and price increases often affect many suppliers, after all. 

It’s also important to develop accurate demand forecasts. Procuring too many materials eats into profits, and procuring too few can halt progress. Accurate forecasting helps prevent this. 

Managing inventory is another integral piece of the process. There are various types of inventory to consider, and losing track of materials can be catastrophic. Some construction materials may also require special storage. For example, some raw goods are more susceptible to humidity and require careful consideration. 

Lastly, it’s crucial to leverage the right tools. In today’s digital age, that often means using software. Accounting software can keep your books up to date, and field management software, like inFlow, will help you track purchases and inventory levels. inFlow even integrates with accounting software like QuickBooks Online and Xero, eliminating a lot of double data entry.

Who are the key players in construction procurement? 

We’ve referenced a few parties involved in the construction procurement process, but having a clear idea of roles is never a bad thing. For instance, “supplier” and “vendor” are often used interchangeably, but there’s some important nuance between the two. 

• Supplier – Generally speaking, a supplier handles raw materials, such as concrete, lumber, and so on. They usually deal in huge quantities and leave the construction companies to handle the rest. 
• Vendor –  On the other hand, vendors usually sell a finished product or offer a specific service. For example, they may sell wooden furnishings like cabinets or offer advanced electrical work. 
• Contractors – These individuals will make up most of the workforce. They’re usually skilled laborers like carpenters, roofers, or electricians. Making a structure habitable requires many niche skills; you’ll often need to find external parties that hold those skills.
• Project stakeholders –  Although these parties aren’t necessarily part of the construction procurement process, they’re essential to the ecosystem. They’re usually the ones seeking businesses to do work. In other words, they’re your clients. 

Wrapping up

And there you have it! A lot goes into construction procurement, and it’s important to remember that project needs will differ. One may require special permits, hard-to-source materials, specialized labor, and so on. Identifying those needs and adapting to them on the go plays a huge role in success.

The post A Small Businesses Guide to Procurement in Construction appeared first on inFlow Inventory.

• Gross profit margin is what % of each sale is profitable. 
• The gross profit margin formula is: gross profit margin = Net sales – COGS / Net sales
• A business can use it with other KPIs to indicate financial health.
• It differs from gross profit. 

Maintaining healthy long-term cash flow is crucial for any business. But, there are a lot of factors that go into determining revenue, and there are a lot of indicators that organizations look at when assessing health. One of these indicators, of course, is gross profit margin.  

At a glance, this metric tells a business how much they earn on each sale. Over longer periods, it serves as a valuable indicator of business health. However, like many business metrics, there’s often confusion surrounding gross profit margin.

So, today, we’ll go over what it means for your business and what factors affect it. We’ll also touch on some similar terms and give you some common strategies you can use to increase your overall profit. 

What is gross profit margin? 

This popular metric is a financial figure that companies use to analyze their financial health. It refers to leftover profit after accounting for cost of goods sold (COGS). In essence, it shows how much money a business makes after accounting for its operating expenses.

Gross profit margin vs gross profit

An important note here is that gross profit margin vs. gross profit are not the same thing, despite the similarities. Gross profit margin is expressed as a percentage of total sales, while gross profit is the sum of total profits and is expressed as a dollar value.

What is a good gross profit margin?

A “good” margin varies depending on your industry. For example, retail and food services consider 20-40% as good, while manufacturing companies use 25-35% as a benchmark.

Generally, any number above 10% is acceptable, while 20% to 30% is considered good, depending on the industry. For high-margin industries, anything above 50% is often seen as excellent. Very few industries will see margins this high. 

How to use the gross profit margin formula

Here’s how to calculate gross profit margin using the gross profit margin formula. 

Generally, you should be aware of your businesses’ COGS and net sales already. They’re vital figures to keep track of and contribute to calculating other useful health indicators as well. 

For this example, we’ll pretend that the net sales and COGS are $275,000 and $200,000, respectively. Do note that figures usually aren’t so clean. This is just for the sake of example. Once we plug the figures in, this is what it looks like: 

Gross profit margin (GPM) = 275,000 – 200000 / 275,000

Now, we can solve to figure out the final margin. 

GPM = 75000 / 275,000

GPM = 0.27 or 27%

How does gross profit margin impact your business decisions?

To be clear, making decisions based solely on a single data point is a bad idea. It’s very rare for one indicator to tell the whole story. It’s just as important to know what contributes to the final figure because, as we mentioned earlier, gross profit margins can vary depending on your industry.  

For example, let’s say your business has a gross profit margin of 12%—a little on the low end, but nothing too out of the ordinary. You could leave things as-is and be perfectly fine, but there might be an issue hiding behind that 12%. 

One product, for example, might be selling exceptionally slow, while another you can barely keep stocked. In these instances, it could be worth selling the slow-moving product at a lower cost and replacing it. Cases like these are common, and looking at just gross profit margin doesn’t tell the whole story. 

However, it’s also true that it’s a very valuable figure. While it doesn’t tell the whole story, it does give you a great bird’s eye view of your overall business success. Because we express gross profit margin as a percentage, it also tells us how much a business makes on each dollar. 

1% means 1 cent every dollar, 5% means 5 cents, 25% means 25 cents, and so on. 

If your margin suddenly dips, that’s a good indicator that there’s something wrong, internally or externally. Here are some common factors that affect the final figure. 

Cost of goods sold 

Your cost of goods sold reflects how well your business operates and how well it reduces its overall operating costs. The lower your COGS, the higher the margin. When calculating gross profit margin, it’s important to have accurate numbers for your cost of goods sold. 

Pricing strategies 

Pricing products based on the overall landscape is usually a good idea, but no matter what you decide, it’ll have side effects. For instance, a higher sale price means more profit but a greater chance of getting undercut by your competition, which means lower sales. Pricing products lower will mean less profit, but you’re likely to bring in more sales. Be sure to find the balance that works best for your business. 

Inventory management 

Believe it or not, inventory management is crucial to a company’s margin. The route products take from purchase to sale significantly impacts their COGS. By extension, it affects gross profit margin. Losing or delaying shipments lowers revenue, and optimizing routes and processes is crucial to long-term success. 

Global affairs

Sometimes, things just happen. The year 2020 brought us a lot of things, and it also taught us a lot about business operations. While COVID is now largely in the rearview, its effects continue to linger, and most are simply beyond control. 

Best practices for improving gross profit margin

Increasing your gross profit margin is usually a slow process. It requires an overall reflection on your business operations, so while small changes will have an effect eventually, it will take time to show progress. 

Something worth noting here is that focusing on one aspect impacting your profit margin will cause the others to suffer. It’s best to hone in on several areas with the biggest impact on your bottom line and improve them simultaneously. 

This means not just raising prices or increasing sales but also identifying deadstock and lowering operating costs. You’ve probably heard, “a penny saved is a penny earned,” and it applies here pretty well. Lowering operating costs might not be as grand as increasing sales, but it also increases profit margins. 

Lower COGS 

We already went over COGS, but it’s worth rehashing. The COGS ultimately dictates how much profit is left after a sale. Lower COGS and increase profit. You can improve your COGS by reducing waste, optimizing stock levels, and negotiating better supplier terms. 

Lower operating costs 

Operating costs aren’t part of COGS but are another factor at play. Employees need their wages, warehouse owners need their rent, leases, and taxes need to be paid, and so on. These costs also eat into your bottom line, so lowering them where possible will increase the gross profit margin. 

Upsell 

Selling existing products at a higher price can be a simple way to increase margins. However, product pricing is ultimately decided by consumer demand, so this requires lots of market insight. 

Purchase at scale

For products that sell year-round, buying in bulk can sometimes be best. The rule of thumb is that the more you buy, the less it costs per unit. If you can take advantage of this ahead of time– and can afford upfront costs– purchasing at scale can substantially increase margins. 

How inventory software can help increase your gross profit margin

Every business’s goal is to achieve the best possible gross profit margin, but achieving that goal can be daunting. However, adopting modern software solutions is a simple way to get the most bang for your buck. 

Our inventory management software, inFlow, can help you improve your gross profit margin in several ways, including:

• Real-time inventory tracking
• Accurate cost tracking
• Purchase order management
• Barcoding 
• Reporting

Optimizing your inventory management might not solve all your problems, but it’ll make a world of difference.

The post Improve Your Gross Profit Margin With Efficient Inventory Management appeared first on inFlow Inventory.

• MAP pricing stands for minimum advertised price
• It dictates the lowest price that a retailer can advertise a brand’s product
• Suppliers and brands use it to protect their interests and reputation
• Unlike MSRP, violating MAP agreements incurs legal punishment
• Retailers often circumvent MAP policies with various sales tactics

Pricing products can be a grueling and highly competitive endeavor. Every business tries to bring in as many customers as possible, often providing products at razor-thin margins. While this is great for the consumer, this race to the bottom on pricing can cause severe damage to brands that sell across various sales channels. 

This is one of the many reasons that MAP pricing (minimum advertised price) policies are common in retail. They help maintain a higher price floor and keep prices stable while protecting brand integrity. As a retailer, however, MAP pricing may be an obstacle to more sales. Today we’ll be going over what MAP pricing is, why it’s important for suppliers, and how to deal with it as a retailer. 

What is MAP Pricing?

As we’ve already established, MAP stands for minimum advertised price. Like the name suggests, it’s a policy that dictates the lowest price that a retailer can advertise a brand’s products at. That’s a bit convoluted, so let’s take a step back. 

Most brands don’t sell their products directly to consumers. Instead, they sell their products at a discount to suppliers or retailers, who then sell them to the consumer at a markup. When a retailer sells a brand’s products, the brand may implement a minimum advertised price policy, or MAP policy for short. When a MAP pricing policy is in place, retailers cannot advertise the brand’s products below a certain figure. 

For example, let’s say that a local retailer lands a deal with the Stanley brand, in order to sell their cups. They set the MAP policy at $50. That means the local retailer cannot advertise the Stanley cups below $50. However, MAP policies specifically dictate the minimum advertised price. As such, the store owner can advertise them at $50, but sell them at $45. 

Lastly, depending on where you are, MAP pricing may not be legal. For instance, at the time of writing, it’s currently allowed in the US and Canada but has more restrictions in the UK and the EU. So, if you’re a business owner, it’s always best to check your local legislation to determine how MAP pricing works in your area. 

Why are MAP pricing policies important? 

One of the biggest reasons a manufacturer or supplier implements a MAP policy is to protect their brand. These days, success as a supplier depends on reaching a wide audience, especially on ecommerce platforms like Amazon. If a new retailer introduces a brand’s products at a significantly lower price, it can have catastrophic effects on the affected brand. Enforcing MAP pricing is one of the ways they protect themselves. 

Wholesalers and manufacturers typically rely on this to provide market stability. It’s a very important part of why they implement MAP pricing to begin with. It’s better to consistently make money over a period of time than alternate between periods of high and low revenue. 

Implementing MAP pricing guarantees a certain level of profit for suppliers and creates a sort of artificial scarcity. MAP prices are often set so that retailers can also make a healthy profit on each sale, but some find such policies restrictive.

For instance, let’s say a business purchases a surplus of products from a particular brand. Over the course of a year, they find they’re not selling what they anticipated and now have a ton of excess inventory eating into their carrying costs. They’re ready and willing to offer the products at a deep discount, incurring a loss, to free up valuable warehouse space. However, due to the MAP policy, their hands are tied.

Lucky for them, there are some workarounds.

Word of mouth 

It may be the digital age, but nothing compares to the power of word-of-mouth. MAP pricing prevents retailers from advertising below a certain price, but it won’t stop customers from talking about low prices. When someone is saving money hand over fist, chances are they’ll spread the word to their friends and family to let them get in on the action. Word-of-mouth advertising is your best bet for retailers looking to circumvent MAP pricing. 

Bundle pricing 

One really common workaround is bundling multiple items together. Legally, two bundled items are considered a different entity, so there’s another layer of security. It also helps attract customers by offering a “discounted price” for purchasing more than one item. For example, if one product has a MAP price of $500, and another of $200, a retailer might sell them as a bundle for $600. Enough to turn a profit, and different enough to avoid violating MAP pricing, but low enough to stand out against the competition. 

Discounts on order totals 

Ever seen those pop-ups offering to knock off some of the final price if you spend a certain amount? Those are often to avoid MAP pricing policies. For example, let’s say a retailer has a $250 product that they think will sell really well at $200. unfortunately, there’s a MAP of $225.

They can work around this by offering a 25% discount on orders above $200. It’ll take $50 off the final price, bringing the item down to $200 after the discount. 

Coupons

Coupons, both digital and physical, are still in active use today. They work on the same logic as the discounts. A retailer may not be able to legally advertise below a certain price, but there’s no law against offering a discount to reach their target price. Coupons are also an effective marketing and customer acquisition tool. 

How does MAP Pricing relate to MSRP? 

Newcomers to the retail space sometimes mix up terms, including MSRP (manufacturer’s suggested retail price) and MAP. It’s not surprising, as the two terms are similar, but the differences are pretty important. 

MSRP refers to what a manufacturer believes the product that they produce should sell for. Like it says in the name, it’s really just a suggestion. There are no legal implications to diverging from it– unlike MAP pricing. If a retailer violates their MAP agreement, they may be on the hook for damages. The chance that the supplier will work with them again is also very slim. 

Software solutions

Whether you’re a supplier trying to maintain a price floor, or a retailer trying to work within the constraints of your MAP pricing policies, a software solution could help immensely. Our software inFlow offers inventory and sales tracking that allows you to easily track your product costs, as well as set your selling price. We even have a built-in barcoding system that simplifies the pick, pack, and ship workflow.

For retailers, inFlow’s new bundling feature allows the easy creation of product bundles. Manufacturing users can also attach a bill of materials, making it easy to keep track of everything. So whether you’re a supplier, manufacturer, or retailer, inFlow can help with your inventory management needs.  

The post Navigating MAP Pricing Policies From a Retailer’s Perspective appeared first on inFlow Inventory.

• Understanding how to forecast sales is crucial for proper inventory management.
• Sales forecasting is a method of predicting future sales using historical sales records and other available data.
• There are many different methods of sales forecasting. 
• Each method considers a variety of different factors & data.
• Knowing how to forecast sales will save you storage space, prevent stockouts, and lower the excess inventory you need to carry.

Something new business owners quickly learn is the importance of knowledge. Not just in running a business but in terms of data. It may seem like a peripheral task, but gathering data over time and analyzing it is key to long-term success. 

One of the most important pieces of data analytics is sales forecasting. Knowing how to forecast sales keeps overhead costs low and lets businesses commit resources elsewhere. Holding the right amount of inventory can also increase profits in the long run. 

The long and short of it: knowing how to forecast sales is crucial. It plays a part in determining revenue and can decide whether a business stays afloat. So, what is sales forecasting? How does it help businesses? Is there more than one way to sales forecast? What does the process look like? 

What is sales forecasting? 

For the most part, the term is self-explanatory. Sales forecasting is the practice of predicting future sales numbers across a specific time period. While this is a simple concept, calculating the correct number requires a lot of data. A wildly inaccurate sales forecast can also cause severe issues, so it’s best to invest the proper time and care.

Why is knowing how to forecast sales important? 

A sales forecast does a lot to help a business, but it also plays a significant role in deciding their overhead costs. Consumers tend not to think about it much, but every product on a retailer’s shelf comes at a cost. It costs them money to purchase it, and its presence takes up physical space. That product also has an opportunity cost: having item A means you can’t have item B there. 

For now, though, we’ll focus on the per-unit cost. Many retail products are relatively inexpensive, but retailers purchase them in bulk. For example, let’s say a retailer purchases a product for $3. Buying 100 isn’t a huge problem: it’ll only cost $300 for the lot. 

Let’s crank that up to 10,000 units– which is actually very little by retail standards. Suddenly all of that costs $30,000. Assuming the business sells all of those units, they’ll still make a profit. But if they only sell half, they now have $15,000 worth of products they can’t sell. That’s effectively a considerable loss. Forecasting sales properly helps avoid these issues. 

What affects sales forecasting?

Before a business can begin sales forecasting, it needs to identify what factors to consider– and there are a lot. It’s possible to control some of these factors, but not all. For example, manufacturing quality is ultimately something a business can control. On the other hand, they have no control over the change of seasons. 

With that said, a common pitfall is trying to account for everything. There will always be something that will influence your business that you will have no control over. That’s just the way it is. Accounting for minor influences can throw off more complex calculations and lead to bad decisions. So, be weary before you build any contingencies into your sales forecast. 

Popular sales forecast techniques

There are quite a few different ways of forecasting sales. This is partly because very few products are identical in every way. They solve different problems in different manners, and as a result, appeal to different audiences. Therefore, no matter how closely you think the two products are related, they may require a different technique. Here are some of the most popular methods for sales forecasting. 

Length of sales cycle 

This method uses previous customer data to predict how long it will take for potential customers to purchase a product. This calculation uses many different customer data points, such as lifetime value, location, and customer segmentation.

Historical method 

Historical forecasting uses historical data to make predictions regarding future sales. While popular in retail, the banking and finance industries also regularly use it. It’s best to use this method when analyzing metrics across a long period of time. For instance, a business that sells seasonal sporting equipment may track performance over several years to predict future sales. 

Multivariable method

Multivariable forecasting models seek to create an accurate forecast by considering a wide variety of factors. For example, they consider competitor activity, product launches, seasonal performance, and customer demographics.

Opportunity stage

This method considers customer pipelines and open opportunities to predict demand. This means factors like product popularity, competitor popularity, market trends, and customer sentiment. Generally speaking, companies with longer sales cycles like subscription models use this method. 

Lead value 

This method of sales forecasting uses lead generation data to predict future demand. These calculations draw from various factors like past purchases, general interests, and customer demographics. 

Intuitive forecasting

We’re going to start this one off with a quick disclaimer. Most businesses shouldn’t use intuitive forecasting. It’s a method that relies more on the analyst’s general sentiment or feelings, rather than backed by hard numbers. While uncommon, it does still have a place. For instance, if you just started doing business and don’t have much data to draw from. That said, the chance that the average business will need this is slim. 

Common challenges

The biggest challenge in sales forecasting is recording the correct data. Although it considers many factors, a sales forecast, at the end of the day, is a lot of number-crunching. If those numbers are incorrect, the end result will also be incorrect– and that can really cost businesses. That isn’t an issue alone, but the average business also generates a lot of data. 

Depending on how advanced their analytics are, they could record the number of sales, how much time a customer spends in the store, or overarching factors like market share and seasonality. 

That’s a lot of data to record, especially if there are multiple locations. Recording by hand takes a long time and increases the rate of error. It’s why businesses are turning to software instead.

How inFlow can help forecast sales

The techniques outlined in this article are pretty straightforward. The challenge lies in continually adapting your forecasts to shifting market conditions and accurately tracking all the necessary data. This is where software solutions come in handy. Inventory management software like inFlow can track how your products move and generate a variety of reports based on the data it collects

inFlow is a powerful, easy-to-use tool that will handle the historical data collection for you, allowing you to focus on other vital aspects of your business. It’s also accessible on any wireless device, ensuring you can monitor your sales and inventory from anywhere in real-time.

The post Inventory Management Through Accurate Sales Forecasting appeared first on inFlow Inventory.

• The ability to estimate construction costs accurately is crucial for ensuring fair compensation and maintaining business profitability.
• Construction cost estimates include direct costs, such as labor and materials, and indirect costs, such as permits and overhead. 
• There are five main types of construction cost estimates—feasibility, intermediate, preliminary, substantive, and definitive—each used at different project stages to refine cost accuracy.
• Businesses can create accurate estimates using software tools that give them quick access to historical data.

Contracts are a funny thing. No matter how hard parties try to create equal terms, it always proves challenging. And in the world of construction, it’s often the workers left with the short end if things don’t go right. That’s why being able to estimate construction costs accurately is so important. Estimates that are too high could cause you to lose business. However, estimates that are too low might cause you to lose money. 

Your ability to estimate construction costs might not be the most important thing, but it’s certainly one of them. An accurate construction cost estimate ultimately dictates whether you receive fair payment. So how do you accurately estimate– and what does construction estimating even entail? Let’s find out!

What is construction estimating?

Also called a building costs estimate, construction estimating is exactly what it sounds like: estimating how much a construction project will cost. Who would have thought? 

Jokes aside, though, a lot goes into it, and calculating the right figure is a complex process. You’ll need to account for various things such as labor, shipping, materials, hiring subcontractors, and securing all permits. 

What goes into a construction cost estimate?

We touched on it above, but generally speaking, there are two main types of costs to consider when making a construction cost estimate: direct and indirect. Direct costs are any expenses directly related to a specific project, such as materials and labor. Indirect costs refer to resources spanning multiple projects, such as permits, licenses, marketing, and any other overhead.

Generally speaking, most of the costs that go into any construction cost estimate are the direct costs of material and labor. Accurately estimating these will take a combination of experience and historical data. After all, construction projects are large, expensive, and require workers from various fields, all of which you’ll need to pay a different rate for their work.

The sheer scale presents issues for material acquisition, as well. When buying in literal tons, the cost adds up quickly. Materials are also subject to more frequent price fluctuations. And when working at such a scale, the price difference of a single dollar can equate to tens of thousands. 

Why is it important to estimate construction costs accurately?

Providing reliable construction cost estimates can make or break any small business. At first glance, it might seem like an accurate building cost estimate only benefits the client, but that’s not true. Clients often require contractors to add specific clauses to protect themselves from runaway expenses. Which means an accurate estimate is in the best interest of both parties.

Beyond the monetary advantages, accurate estimates will also give your business a reputation for transparency and reliability. This will result in a lot more happy customers who will be more than willing to promote your services. According to a survey by the Joint Center for Housing Studies at Harvard University, about 40-60% of participants said they hired contractors based on referrals.  

How do contractors estimate construction costs?

At the end of the day, construction estimating is a complex task that involves many different numbers and calculations. The math itself might be simple, but the number of factors to consider makes it anything but. 

Regardless, it’s important to know what the client wants before making any estimates. If they already have design documents on hand, it’s up to the contractor to create an estimate based on their know-how. 

In some cases, though, clients might not have those design documents– so where do contractors go from there? As it turns out, there are a few different ways to estimate construction costs. Let’s examine them to answer this question. 

Types of construction estimates

There are many different methods for creating a construction cost estimate. These methods are also subject to tweaks depending on circumstance, but they usually fit one of five estimate types as laid out by the American Society of Professional Estimators (ASPE). Here’s an explanation of what they are and when contractors use them. 

Feasibility

Parties develop a feasibility estimate before the project’s true conception. Experts create these based on the cost of similar projects, but they can vary wildly in terms of accuracy. They generally range from -25% to +75% in cost. Feasibility estimates are more concepts than anything and could be based on a list of criteria. Prospective clients use these to determine whether a project is feasible and/or reasonable.

Intermediate 

Potential clients use intermediate construction cost estimates to determine whether a project is feasible. While a feasibility estimate serves a similar purpose, intermediate estimates are more in-depth. Like feasibility estimates, large-scale project overseers use them when deciding whether to engage or abandon a project.

Preliminary 

A preliminary building cost estimate is more detailed than both its predecessors. Its purpose is to be accurate enough for funding measures. As such, it’s crucial that preliminary estimates are as accurate as possible. 

Substantive

This type of estimation uses unit costs to generate a reasonable final cost. A lot goes into this one: schematics, deliverables, and project objectives. It’s used during the project to manage the budget. 

Definitive

You should only create a definitive estimate when all costs are known. Contractors use this type of estimate to place bids on existing projects. While it is the most accurate type of estimate, it may still be susceptible to change due to economic factors.

When do contractors create an estimate? 

You might have noticed an escalation of sorts with those estimate types above. That’s no coincidence—instead of setting a price and sticking to it, contractors constantly reevaluate their costs. Depending on the project scale, one price hike could put them in the red. It’s important to keep one eye on cost at all times. 

This could be especially relevant depending on the scope or type of project at hand. Building an industrial-grade laboratory will require more expensive and uncommon materials than, say, an apartment building. Materials for such a task may also require special expertise, and be subject to more extreme price fluctuations. 

Most contractors will submit a series of building cost estimates at varying stages of the process, each with increasing nuance. So, you may start with a feasibility or intermediate estimate and work up to a definitive one at the client’s request.

How to accurately estimate construction costs

Estimating construction costs confidently takes time and experience. However, some tools and best practices can help guide you.

• Understand the project scope—this might be the most important part of crafting a building cost estimate. Without a complete understanding of the project scope, it would be impossible to provide an accurate estimate. Ask as many questions as possible and study all the available documentation carefully. 
• Use historical data and software tools—one of the easiest ways to predict the future is to look to the past. With field service software like inFlow, you can quickly check your historical data through our reporting feature. You can see the components used on similar jobs and what you paid for them.  
• Account for contingencies—unforeseen events are bound to happen, so you should always account for these unexpected expenses. Typical contingencies range from 5-10% of the total project. 
• Plan for economic factors—with inflation on the rise it’s safe to assume what you pay for materials today will be wildly different from what you’ll pay next year. Be sure to factor this in when you estimate construction costs. 

Wrapping up

As the construction industry continues to grow, accurately estimating construction costs is crucial for the success and profitability of any project. It ensures fair compensation and builds a reputation for reliability and transparency. By understanding and applying the various types of construction cost estimates, contractors can provide accurate and reliable projections that benefit both clients and themselves.

The post A Quick Guide to Construction Cost Estimation for Contractors appeared first on inFlow Inventory.

• Fill rate is a KPI that measures the number of orders a business is able to fulfill. 
• Businesses can use this metric to identify problems with their inventory management, productivity, efficiency, and demand forecasting accuracy.
• The fill rate formula is: Total Orders Shipped/Total Orders Placed x 100
• There are several different types of fill rates; some of the most popular are order, line, location, case, and channel. 
• When fulfillment is low, there are several steps that can be taken to improve it, such as increasing your available inventory and readjusting your reorder points.

There are many ways to measure a business’s performance. One of, if not the most popular, is by tracking key performance indicators or KPIs. These metrics don’t tell the full story (and numbers alone never will), but they remain a useful business tool. At a glance, they can tell stakeholders whether they’re meeting goals in sales or customer retention. 

Among these KPIs, fill rate remains one of the most important. At a glance, it tells businesses their “success ratio” in filling orders and can be useful in raising customer satisfaction. But what’s the definition of fill rate, and how can companies use it to estimate their year-round performance? Let’s find out!

What is fill rate?

The fill rate definition is pretty simple. It’s the percentage of orders a business can fulfill by drawing from existing stock without placing backorders or incurring a stockout. In short, it’s a method that companies use to gauge what portion of market demand they can meet satisfactorily. It’s an application of service rate, which is an attempt to quantify a system’s performance. 

A “good” fill rate can be anywhere from 85% to 95%. Ideally, most maintain 97% to 99%. Achieving 100% is possible in short bursts but realistically impossible in the long term.

Why is fill rate important?

It’s an important metric because it gauges productivity and efficiency in warehouse and shipping teams. Fill rate can also indicate how accurate current demand forecasts are and identify areas that need improvement. Overall, it’s a useful figure that’s easy to calculate. 

How to calculate fill rate

Fortunately, the fill rate formula is pretty simple. Here’s what that looks like: 

See? Simple! Although it gets a bit trickier when dealing with bigger numbers, service rate remains one of the easiest KPIs to actively track. 

Here’s an example. 

Let’s say there’s a retailer that sells office chairs. They receive an order of 1,000 units from a company moving into a new office building. They only have 650 units in their storage, so they can’t complete the order in its entirety. Let’s use the fill rate formula with the numbers above.

650/1000 x 100 = fill rate 

.65 x 100 = fill rate

65% = fill rate

In this case, the business has a very low fill rate of 65%. This is an indication that the retailer should rethink its inventory management. They may want to consider increasing the amount of inventory they have on hand, readjusting reorder points, and doing more extensive demand forecasting.

Types of fill rate

There are various types of service rates that a business might actively track across multiple departments. They measure the overall success rate of different departments and can highlight areas of potential improvement. Some of the more common types of fill rates are line, order, location, case, and channel. Here’s a brief description of each. 

Order

This refers to how many orders the business can fulfill independently. Importantly, this generally means “without issue.” Backorders don’t count. This is the most common metric used but lacks much of the nuance that some of the other fill rates provide.  

Line

This fill rate refers to how many line items a shop can fulfill on an order. For example, if a retailer has an order for ten items but can only fulfill five of them, they have a line fill rate of 50%. This metric is a great way to get more granular for companies that sell a lot of different SKUs. 

Location

This metric tracks how well a specific location can meet order demands. It’s ideal for anyone who operates from multiple locations, such as storefronts or warehouses. It gives businesses the opportunity to assess which locations are doing the best and make adjustments to ensure everyone is operating efficiently.  

Case

This is generally used by merchants who sell in large quantities, like wholesalers and distributors. It measures how many cases of product a company ships out in comparison to orders. 

Channel

Most modern businesses take advantage of multiple sales channels. For example, a retailer may have several brick-and-mortar stores but also sell its products online. This metric tells these businesses which sales channels have the highest fill rate. 

How can a business improve fill rate?

The main priority for most businesses is optimizing their fulfillment. The higher the fill rate, the higher the revenue. Not only that, it also means more satisfied customers. So, how does your business improve its fulfillment process?

Generally, your business processes, inventory flow, and even your storage space’s physical layout keep fulfillment high. Still, there are a few methods that can kickstart everything. Here are some things to consider. 

Forecast demand 

It can seem counterintuitive, but maintaining the right amount of stock in the moment requires some foresight. Accurately predicting the right amount to carry keeps capital out of warehouses and reduces the change of stockouts or backorders.

Forecasting demand can be tricky without the proper software. Our software inFlow has fantastic reporting features that give our users valuable data with just a few clicks and relieve the headache of demand forecasting. 

Recalculate reorder points 

Reorder points are a common practice for inventory management. They ensure your business never runs out of stock and, therefore, will improve your fill rate. Reorder points are calculated considering things like supplier lead time and safety stock to ensure you always maintain optimal inventory levels.

Some business owners think that once they’ve found a good reorder point, they can just leave it indefinitely. But the truth is that these numbers should be updated based on your fulfillment. A low service rate probably means your reorder points are also too low.  

Implement software solutions

Software continues to grow in popularity among many different types of businesses. There’s no substitute for hard work and competency, but software makes things significantly easier. Inventory software like inFlow can handle a wide variety of tasks. It can generate reports from historical sales data, help you set reorder points for your products, and then notify you when your stock dips below those levels. It also has purchase orders, sales orders, invoicing, and barcodes. 

Wrapping up

KPIs are a good way of quantifying performance at a glance. They won’t tell you everything, but they will give you enough to act on. Among these KPIs, fill rate may be the most important. It measures your business’s reliability in fulfilling orders and is an indicator of overall productivity.

The post Understanding Fill Rate and How to Calculate It  appeared first on inFlow Inventory.

• Bidding on government contracts offers long-term, stable, and highly lucrative opportunities for construction companies. 
• Businesses that win government contracts will enhance their reputation and pave the way for future opportunities. 
• Bidding on government construction projects can be highly competitive, requiring detailed and compelling RFQs.
• Small businesses can utilize software tools to craft accurate, comprehensive RFQs to compete more efficiently for government contracts.

The construction industry is the backbone of modern society and one of the most valuable markets in the world. People need homes, companies need office buildings, retailers need storefronts—the list goes on. Construction projects vary wildly, but one subsector stands out as particularly lucrative: government contracts. This is why every contractor should know about bidding on government contracts. After all, a successful bid could result in significant growth for your company.   

Landing a government contract might not fund a business for its lifespan, but it certainly pays well, and more importantly, it can open other doors. In this article, we’ll go over what a government contract entails, what bidding on government contracts looks like, and how to bid on government contracts. 

What is a government construction contract? 

Even if you don’t give it much thought, you probably understand that the government does a lot of things and, therefore, employs a lot of people. In fact, at the end of 2022, the US federal government employed 2.87 million workers, which was 1.9% of the US workers at the time. While the government isn’t a typical business, it still requires many things that a typical business does, such as office buildings, computers, networks, servers, and so on.

Generally speaking, the government doesn’t retain employees capable of setting all these things up. Instead, they outsource it via contracts. From here, different companies can start bidding on government contracts. 

Something worth noting here is that there are many different types of government contracts. As we mentioned earlier, the government is responsible for many things. For example, the military needs equipment to function, but the government doesn’t manufacture it. Instead, it outsources that work to private companies through government contracts. 

The military is the most obvious example, but there are government contracts for a number of different services, from transportation and waste disposal to more complex tasks—like designing and building rockets for NASA.

Government contracts for construction are no different. They need something built, so they allow various companies to bid on government contracts in order to find the best fit. 

Why should contractors bid on government contracts?

There are many reasons to bid on government contracts. First and foremost, they tend to be lucrative. The government has deep pockets and generally worries more about receiving the best product or service available than price. Government contracts also tend to be long-term. Instead of taking place over one or two years, government contracts generally span over five or ten. 

This offers a lot of stability in an industry infamous for quickly changing conditions. For example, in 2022, NASA awarded SpaceX a $843 million contract for the Artemis 4 mission, which isn’t until 2028. 

Contractors who win a bid on government contracts will benefit more than just financially. A government contract is a notch on the belt for any field service company. It tells other potential clients that the government chose your company for the job out of all the other applicants. That counts for a lot. 

In short, winning a government contract has many less tangible benefits aside from money.

Where do contractors find government construction contracts? 

So, now the big question is how to bid on government contracts as a small business. There are a few different ways. Occasionally, a government may reach out to a specific business or company, but this is uncommon, especially for smaller businesses.

Most of the time, federal governments will have a website or portal to list contract opportunities. The USA, for example, has sam.gov, which lists federal contracts for registered businesses (note: registration is free). Canada, on the other hand, has Canada Buys. Regardless of where a construction business operates, there are opportunities available. So check to see how your local government advertises their contracts. These websites are where all construction companies go when they are looking to bid on government contracts, whether your company has two people or two hundred.

However, more prominent companies will often have an edge when bidding on government contracts with an enormous scope of work. This is why organizations like the US Small Business Administration (SBA) exist. They help small businesses by offering contracts that match their skill sets. That said, they have a formula for deciding whether a business is “small.” So, ensure your business meets those criteria before applying or bidding on government contracts.

How does the bidding process work?

Once you’re ready to bid on government contracts, you must register with the relevant government website or portal. This process is pretty straightforward and shouldn’t take too long. From there, you’ll move on to the next phase, the request for proposal ( RFQ). The government in question will outline the project requirements and invite contractors to submit proposals. At this phase, you get a chance to sell yourself, stating estimated costs, timelines, qualifications, and so on.

The request for proposal phase is an audition, and this is where the competition starts. A ton of different companies will be bidding on government contracts and sending in their proposals. Standing out among the crowd requires being able to give better numbers, whether that’s a quicker schedule or lower costs. Organizing information in a cohesive way and including visuals can also provide an edge over the competition. 

At the end of the day, though, making solid proposals requires intimate market knowledge and experience. These are what craft your proposal and ultimately decide who wins the contract. Do your research beforehand and take the time to craft an RFQ that will stand out from your competition.  

How to successfully bid on government contracts as a small business

Most businesses start small, but that’s no reason to forgo bidding on government contracts. To be clear, though, you won’t be competing with just other small businesses. You’ll also be competing with huge conglomerates that have storied tales behind them.

To stand out, it’s all about effectively selling yourself. To do this, you must create a comprehensive and competitive RFQ. Here are three major things to consider:

• Understand the scope—Ensure you understand what you’re getting yourself into when bidding on government contracts. Be honest about timelines and material costs because overpromising never ends well, especially when dealing with the government.
• Cost Analysis—presenting an accurate cost analysis is one of the most essential aspects of any RFQ. If you use field service software, such as inFlow, this shouldn’t be too hard. Our software provides users with various reporting features that make job cost analysis fast and easy. 
• Compliance—The construction industry takes compliance very seriously, and so should you. Your RFQ should show without a shadow of a doubt that your company will meet all regulations and compliances.  

A great RFQ is also more than just numbers on a page. You should also emphasize your company’s strengths and past achievements. You could even think about going the extra mile and including visuals to help illustrate your vision for the government contract. 

Final thoughts

Making a successful bid on government contracts is no easy task, but the payoff is enormous. If you spend the time to find and bid on these contracts, you could set up your construction company for years to come.

Bidding on government contracts doesn’t have to be daunting, either. It’s all about having the right tools to make the process easier and less time-consuming. With the right software solutions, you’ll win those contracts in no time.

The post The Contractors Guide to Bidding on Government Contracts appeared first on inFlow Inventory.

• MOQ (Minimum Order Quantity) is the minimum number of units a business is willing to sell per order to ensure a certain profit margin with each sale by covering the cost of goods sold (COGS). 
• Formula: Minimum Order Quantity = Total Cost of Order / Unit Cost of Production 
• MOQ for manufacturers dictates the minimum quantity for a production run to be profitable.
• Minimum order quantity is not suitable for every business, especially direct-to-consumer retailers or expensive, low-demand products like appliances.
• Some factors that affect MOQ include demand, break-even point, and production capacity.
• There are four types of MOQ; low, high, simple and complex. 
• Software solutions can assist in calculating accurate MOQs.

Running a business might seem simple. Sell your product, make a profit. Easy, right? Unfortunately, reality isn’t quite that simple. Both wholesalers and manufacturers need to consider the cost of goods sold (COGS) when selling their products, and smaller orders tend to result in higher COGS. If a product’s COGS is $15, and you sell it for $14, you’re taking a $1 loss each sale. This is, in part, the reason that businesses may set a minimum order quantity or MOQ. 

But what is the MOQ meaning, and how does it help businesses remain profitable? We’ll be going over all of that and more today. 

Minimum order quantity (MOQ) meaning

As we said above, MOQ stands for minimum order quantity. As the term suggests, it’s the minimum number of units a business is willing to sell per order. For example, if a wholesaler sets an MOQ of ten units, their buyers must purchase at least ten per order. 

An important note here is that MOQ and economic order quantity (EOQ) are not the same thing. EOQ represents the ideal amount of product that a business should stock to maximize profits while minimizing costs. We won’t go in-depth about it, but if you want to read more, you can check out our article about EOQ here. 

The MOQ meaning changes slightly between businesses and industries. For example, wholesalers tend to sell in bulk already, so for them, MOQ typically refers to the minimum order to receive discount pricing. On the flip side, for retailers, it’s the minimum they purchase per order from suppliers. For manufacturers, it’s the minimum number of units requested in order to begin a production run.

Why is MOQ useful? 

We should start by saying minimum order quantities aren’t a useful sales tactic for every business. This is because MOQ’s general purpose is to guarantee a certain profit margin with each sale. Its application may vary from industry to industry (MOQ meaning in manufacturing differs from the MOQ meaning in wholesaling, for example), but its purpose generally remains consistent. 

It’s important to note that an MOQ should only be set after careful consideration and a lot of number-crunching. Setting prices even a tad bit too low can have catastrophic effects, especially for businesses with high MOQs. 

However, once a business finds the right MOQ at the right price, they guarantee a certain profit with each sale.

For example, let’s say a manufacturer looked at all its operational costs, such as the costs of running a production cycle, picking and packing, shipping, taxes, etc. After this analysis, it concluded that it needs to manufacture at least 500 units in order to make its desired profit from a production cycle. If a manufacturer sets an MOQ of 500 units at $5/unit, it’ll net $2500 with each sale at a minimum.

When to avoid implementing minimum order quantity

Of course, no business model is one size fits all. While there are exceptions, MOQ tends to work best with high-volume, low-cost products. It’s also important to note that it’s more common for manufacturers, distributors, or wholesalers to have a minimum order quantity.

Typically, direct-to-consumer retailers don’t use MOQs. MOQ can sometimes be confused with order minimums used by ecommerce retailers, but these two things are different. 

For example, implementing a MOQ for something like washing machines is probably a bad idea if you’re a retailer. They’re expensive, and consumers typically only need one. An occasional bulk order might come in, but not often.

On the other hand, a smartphone manufacturer might implement a minimum order quantity for wholesalers or retailers. While still expensive, smartphones are still cheaper than washing machines—and almost everyone uses one daily.

A good rule of thumb is that minimum order quantity is ideal for high-demand, easy-to-sell products. 

MOQ formula 

So far, we’ve explored the MOQ meaning. So– how do you calculate it?

You could plug a few numbers into an equation, but finding the ideal MOQ is a complex, nuanced undertaking that requires an intimate understanding of a business. Fortunately, these days, robust wholesale software can collect data, crunch the numbers, and help you implement the ideal MOQ. 

However, if you’re looking for an oversimplified formula to get you started the MOQ formula would look a little something like this:

That said, it’s still important to understand what factors affect MOQ. Generally, three main factors directly impact minimum order quantity.

• Demand  – At the end of the day, businesses survive according to demand. No demand means no sales, which means no revenue. 
• Break-even point – The break-even point is exactly what it sounds like. It’s the per-unit price that yields no profit and incurs no loss. Knowing this number keeps businesses from setting the MOQ too low. Make sure to factor in overhead costs like storage. 
• Production capacity – Even if a product is in high demand, it means nothing if no one can manufacture it. Unfortunately, production capacity can be volatile. It’s affected by many factors, such as material scarcity, supply chain disruptions, and so on. 

Different types of minimum order quantity

There’s a few different types of MOQ: high, low, simple, and complex. Though the MOQ meaning might change between each one, their purpose remains the same. Let’s take a closer look at each. 

Low minimum order quantity 

A low MOQ can range anywhere from 50 units to 250. While setting a low MOQ doesn’t do much to maximize profitability, it results in a low barrier of entry. Customers are more likely to complete– and repeat– their orders. 

High minimum order quantity

The inverse of low MOQ. Like before, this number can vary greatly but usually refers to anything above 500 units. A high MOQ leads to better margins and larger sales figures, but it might decrease the number of sales. 

Simple minimum order quantity

A “simple” MOQ means there’s a single condition to the order. Usually, this is the MOQ itself– manufacturers will set a minimum to guarantee a profit. A simple minimum order quantity will be the same for all buyers. 

Complex minimum order quantity

A complex MOQ means there’s more than one condition to the order. For example, manufacturers may limit the use of a certain material to a certain amount before accepting the order. This is more common in industries where customization is important. 

How inFlow can help you set your MOQ

And there you have it! Now you know all about the MOQ meaning and its different forms. Before you set off to calculate your ideal minimum order quantity, ensure you truly understand your business’s ins and outs. Working with improper numbers and calculations can cause big issues.

We make it easy for inFlow users to calculate their MOQ. Our inventory management software helps you calculate the cost of goods sold and provides detailed sales records. You can use these numbers to help you determine the perfect MOQ for each of your products! So, if you want something to help you find those perfect MOQs, look no further than inFlow!

The post Why Minimum Order Quantity (MOQ) Matters in Wholesale and Manufacturing appeared first on inFlow Inventory.

• Cycle time is the amount of time it takes a manufacturing process to convert raw materials into finished products.
• The cycle time formula is: cycle time = net production time / number of units produced.
• Cycle time is best understood alongside takt time (production rate to meet demand) and lead time (order placement to delivery).
• Understanding cycle time helps with resource allocation, planning, quality control, and cost management.
• Extremely low cycle times can sometimes impact the quality of your products.

In today’s world, many things depend on collecting relevant data. The manufacturing process is one of those things. For manufacturers to accurately measure the correct input and output of their products, they’ll need to understand their cycle times, and using the cycle time formula is an easy way for them to do this.  

So, what are cycle times? How do you use the cycle time formula to calculate them? Why is knowing cycle time valuable for manufacturers?

Let’s jump into it, starting with the basics. 

What is a cycle time?

When you boil it down, a manufacturer’s cycle time is the time that it takes for them to turn raw materials into a finished product. Keep in mind that in the world of manufacturing, “finished product” might mean different things from product to product. 

For niche, highly customized products, a product could be finished but needs input from the customer to finalize the order. For example, if you’re a tailor selling custom suits, the product is only considered “finished” once your client tries it on and approves it. In these cases, the final cycle times can be more unpredictable.   

How to use the cycle time formula

As important as it is, calculating cycle times is relatively simple. Just use the cycle time formula, also known as the timing formula. Here it is: 

Net production time should account for any downtime in the manufacturing process throughout the day. For example, let’s say that a tile manufacturer takes 8 hours to make 200 tiles, but they experience 3 hours of downtime due to machine repairs. Their net production would be 5, and the number of units produced would be 200. Plugging those figures into the formula gives us this: 

Cycle time = 5/200

You can take these numbers and whittle them down to 140, meaning that this imaginary tile company produces 40 tiles every hour. Let’s reduce this number further and figure out our cycle time in minutes. After all, in the world of manufacturing, every minute counts. Because one hour equals 60 minutes, we’ll set the “1” at the top to 60. That gives us this: 

Cycle time = 60/40

Simplifying it further yields the following: 

Cycle time = 1.5

That means the tile company produces one tile every one and a half minutes. It’s worth noting that we’ve chosen nice, clean numbers for this example, but it doesn’t always work like that. You’ll often find yourself with messy, uneven numbers. 

So, now that you know what cycle time is and how to use the cycle time formula, let’s talk about why you should care. 

Why is the cycle time formula important?

Now, as important as knowing the cycle time is, it’s still just a single data point. And a single data point is rarely ever useful on its own. It’s best to compare it to other data points or use it to gather more. Either way, it’s all about using (or gathering) more data. 

In the case of the cycle time formula, an excellent place to start is to compare the results to other similar data points. There’s two data points in particular to be aware of alongside cycle time: takt time, and lead time. Here’s what you need to know about both of them. 

Takt time 

The term “takt time” comes from the German word “taktzeit”, which means “cycle time.” In the early 16th century, it was used to refer to regular rhythms, like that from a clock. In manufacturing, it represents the minimum production rate required to meet demand. Similar to the cycle time formula, there’s a formula used to calculate takt time. 

Let’s say that for a given month, the customer demand is 300 units. Sounds small, but big products require a lot of time. In that one month, let’s assume that there are 160 hours available for production. Setting up the equation looks like this: 

Takt time = 160/300

That comes out to the following: 

Takt time =0.53

This would mean the takt time is 0.53. This means that the business in question must produce 0.54 units per hour to meet the demand. 

Manufacturing lead time

The term lead time can take on varying meanings depending on the industry. Lead time, in the manufacturing world, is the time it takes from when an order is placed until it’s delivered. Unlike cycle time, lead time considers everything from sourcing, preprocessing, and shipping. If the cycle time formula deals solely with the manufacturing process, then lead time takes peripheral processes into account.

The manufacturing lead time formula would look something like this:

To help illustrate, let’s say your company fulfilled a shipment of 3000 units. It took 72 hours to source the materials from your supplier, 4 hours to prepare them for production, and 16 hours to manufacture them. Once finished, it took 2 hours to pick, pack, and ship them and 72 hours to reach their destination. Let’s put these numbers into the above formula:

Manufacturing lead time = 72h + 4h + 16h + 2h + 72h/3000  = 166h/3000   = 9960min/3000

That would mean that in this example, the manufacturing lead time would be 3.32 minutes per product.

What should you do with these data points? 

Using some of these data points is pretty straightforward. For example, businesses use takt time to determine whether their output can meet demand. In the above examples, the cycle time is more than adequate to meet the takt time. 

That means the output is capable of meeting demand. It’s not always as straightforward as comparing two numbers, however. Take manufacturing lead time, for example. On its own, lead time doesn’t tell you much. However, comparing it to cycle time can help identify inefficiencies. 

For example, if the lead time is substantially higher than the cycle time– think three or more times greater– that’s a good indicator a business is spending too much time on peripheral tasks. This could include tasks like packaging, shipping, and managing supply lines. It could also indicate poor organization or other inefficiencies that cripple production. 

Are lower cycle times always better? 

In a word, no. Having a low cycle time is a good thing, but you need to ensure that those low numbers aren’t causing a reduction in quality.  

Assuming that the demand exceeds the current production rate, you could (and should) find ways to reduce your cycle times. However, once you reach a certain point, reducing the cycle time too much can sometimes mean a drop in quality or an increase in errors. When you’ve reached this point, it’s best to consider scaling your operation rather than reducing your product cycle time. 

And as with anything, there’s a balance between quantity and quality. If you don’t meet that balance, you’ll find your customers leaning towards your competitors. 

Don’t count on the cycle time formula alone

As helpful as the cycle count formula is, it only yields a single data point. And on its own, there’s only one thing that it tells you. Similar data points like takt time and manufacturing lead time can yield more information when used in conjunction. 

Harnessing the power of manufacturing software, like inFlow, can be especially useful when collecting valuable information about the manufacturing process. Our customers love the reporting features we’ve included in our system that make finding valuable data points quick and easy. We’ve also tailored our software better to fit the needs of manufacturers, big and small. Our most recent manufacturing update includes features like kitting/bundling and manufacturing orders (MOs). 

Not to mention the robust barcode system built right into our software. With the added speed of barcodes, manufacturers can reduce their cycle times significantly. You can scan barcodes to receive your shipments of raw materials and use them to pick and ship your orders right inside inFlow!

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