If you want to see a business owner cringe, ask him about his inventory. He will begin talking in a language few souls on the planet understand, using industry terms like “inventory turns,” “FIFO,” “LIFO” and “cycle counting.” If you are still standing there by the time he gets to “COGS” (cost of goods sold), I admire your resolve.
Being in the business of helping organizations create better processes to control their inventory, it was ironic that an insurance adjuster told me I would have to perform an inventory of my personal assets after a fire destroyed my home in 2004.
“You know, the number of televisions, DVD players, computers, stereo equipment, etcetera, that you owned,” the adjuster said as we were walking through what was left of our home (which fortunately didn’t burn to the ground).
At first I thought this would be a piece of cake, since my wife and I are minimalists. After all, we only had two televisions, two DVD players, two computers, a sofa and love seat, etc.
But the adjuster went on to say that he needed a list of everything, because it’s the information on that list that the insurance company uses to generate my reimbursement check. He said they would need all the makes, models and serial numbers of the items; any photographs of my assets; any receipts we had; and the purchase date of each item as well.
After the magnitude of what he was asking sank in, I started to panic. My wife (who was then seven months pregnant) and I began to frantically go through what was left, trying to piece together a list of our assets.
It then began to dawn on me just how complicated taking inventory after a fire actually is – and what this means for businesses.
Think about a business that does $100 million in sales revenue. The value of its inventory will range between 6% and 20% of its top line sales. In other words, the business has between $6 million and $20 million worth of inventory in its warehouse at any given time. That’s a lot to lose in one fell swoop!
That same principle more or less applies to private homes. If you live in a home with a real value of about $500,000, chances are the things in your home (including everything in the garage, attic, basement, front and back yard, etc.) will be valued somewhere in the range of $250,000 and $350,000. That’s a lot of stuff to try and remember in the event you didn’t take inventory.
Most people only think about the “easy-to-remember assets” – things like the refrigerator, stove, sofa, dining room furniture, bedroom furniture, etc. But there can be a lot of “oh yeah, I didn’t think about that” assets, such as ceiling fans, pots and pans, silverware, clothing, toys, tools, lawn furniture – the list goes on.
As my wife and I listed out all the items we had lost, I thought about all the times I said I was going to inventory everything we owned, but never got around to actually doing it.
I also thought about the people affected by Hurricane Katrina. I felt really sorry for all of those people, knowing that less than 20% of homeowners have an accurate inventory of their assets.
I also thought about the fact that approximately 40% of all small to medium-sized businesses never reopen after a catastrophic event.
Would your organization be able to produce a list of its assets? The sellable inventory probably — but what about the number of desks, chairs, computers, fax machines, paintings, cubicles, filing cabinets, telephones, calculators, cash registers, bookshelves, racks, forklifts and pallet jacks?
It is difficult enough for organizations to document their assets during mergers and acquisitions, let alone documenting them after a fire. Remember that the “burden of proof” is on you, the policyholder, not your insurance provider.
What’s more alarming is that natural disasters have been on the rise as of late: In 2000-2005 there were as many major storms in the U.S. as there were in all of the 1990s. Seven of the ten most expensive hurricanes in U.S. history occurred in the 14 months from August 2004 to October 2005. And now we have the threat of terrorism on top of the increasing number natural disasters.
Remember that it is in your best interest as a business owner to keep accurate inventory of everything you own. Don’t pay on an insurance policy year after year only to not receive all that is owed to you!
Back to my house fire: It has taken us more than two years to receive our final payment, which was only 55% of the total value of everything we owned. Believe me, when you are forced to create an inventory from memory, you’ll wish you had taken the extra time to cover your assets.
Rene Jones is the founder of Total Logistics Solutions, a warehouse consulting organization headquartered in Burbank, CA.