Rx for a Healthier Business



Rx for a Healthier Business: Cover Your Assets

Thu, Jun 14 2007

Healthy gross margin profit comes from a productive inventory!

The best productivity measure of inventory is turnover.  Retail experts believe that improving turnover by 1 point can improve gross margin profit by as much as 50%!

Turnover measures the number of times an inventory is sold and replaced during a time period.  Turnover also reflects the amount of sales generated per dollar of inventory invested.  When we say you turned your inventory four times, what that means is the average dollar of inventory investment generated four dollars in sales.

Faster turnover means more business was done on less inventory.  Slower turnover means you you had to purchase more  merchandise to do the same amount of business.

Example:  If you did $100,000 in sales last year, and your average amount of retail inventory for the period was $67,000, you turned your inventory 1.5 times.  But if your average inventory was $25,000, you turned your inventory 4 times.

You can also use the turnover rate to calculate the desired average beginning of the month inventory for each department.

Example:  If you plan to do $100,000 of sales in the gift department, and plan to turn that inventory 4 times, the average dollar amount of inventory necessary to meet sales goals, profitably, would be $25,000.

Depending on the department, turnover rates vary. Flowers and candy have a faster turnover rate than gifts.  (Flowers turn 48 times or more per year, candy turns 9 to 12 times per year, and gifts 3 to 4 times per year).

Faster turnover is desireable because:

  1. Customers will see new merchandise every week.
  2. Money is freed up to my new merchandise.
  3. Merchandise is less likely to become shopworn.

How can you improve turnover and subsequently gross margin profit?

  1. Plan sales and inventory levels for each department using industry standard turnover guidelines.
  2. Use six-month merchandise buying plans.
  3. Buy smaller amounts more frequently.
  4. Use vendor control and exchange programs.
  5. Use smaller stock rooms.
  6. Take timely markdowns.

Summary:  Improving inventory turnover is the best way for retail operators to maximize gross margin profit and make the most of existing selling space.  Retailers that consistently set sales goals, create and use merchandise buying plans and reports will realize a gross margin profit well above the industry standard.