Why Improving Your Retail Inventory Turn
Puts More Cash In Your Pockets
by: James Hallman
To many retailers,inventory turn is one of the most confusing concepts in the retail business.
Most know that improving the inventory turn rate means less money invested in inventory, therefore more cash is available to use in other areas of the business, or to keep in their pocket. The clouds of confusion seems to swell around two main issues:
1. Exactly what does it mean?, and
2. Exactly how do you do it?
EXACTLY WHAT DOES INVENTORY TURNOVER MEAN?
The definition of inventory turnover changes, depending on to whom you are talking and from what background they come. Some will talk about turning your inventory investment at cost, others will talk about turning your retail inventory at retail. The formulas they share with you for computing your inventory turn will be greatly different.
For instance, I just visited another website, where the author is talking to an audience of wholesale distributors- people who sell goods at bulk out of warehouses.
Here's the formula the author shares with his audience:
Inventory turnover is calculated with the following formula: "Cost of Goods Sold During The Past 12 Months Divided By The Average Inventory Investment During The Last 12 Months".
The author goes on to note: "Inventory turnover is based on the cost of items (what you paid for them), NOT sales dollars (what you sold them for)."
Now, compare this with the formula that most retailers use, and which we at The Hallman Company use in working with our clients:
"Inventory turn rate is calulated by dividing your retail sales for 12 months by the average inventory investment at retail during the past 12 months".
You see, in one instance, people are advised NOT to use annual sales in the formula, in the other instance they are encouraged to definitely use annual sales!
Confusing, huh?
The reason, of course, that we believe you should use net sales (after the impact of markdowns and other discounts) and average retail inventory (fully marked up) is so that you can better "see" the impact of markdowns on the performance of your inventory.
A merchant's mission is not only to get as high an inventory turn rate as possible, but to do it while preserving the initial markup, or margin of profit, as possible. That's why we like to use the fully marked up retail value of the average inventory as a benchmark.
In actual practice, it really doesn't matter!
Either formula will show you how often you are turning your investment.
The question is, once you have gone to the trouble to work either formula and to know what your inventory turn is, what are you going to DO about it? What actions will you take?
No matter what your product is, from bananas to bras to bikes to bulldozers, you have to know with a relative degree of accuracy, how many can I sell per (week, month, season)?
At The Hallman Company, we use a proprietary forecasting tool (Winning @ Retail®) developed especially for retailers, which forecasts sales by month, for up to 12 months out, with an accuracy rate tracked as high as 94%.
We can do this for any classification of merchandise, in any type of store, anywhere.
That's one reason our client retailers invite us into their business on a regular basis. Armed with this and other vital infomation, they can make better merchandising decisions, which results in higher sales, fewer markdowns, more satisfied customers, and of course, higher inventory turn, which means less money tied up in inventory, or freed up for expansion of the business into other areas.
To learn more, just Contact Us .
ABOUT THE AUTHOR: James Hallman has over 40 years in retail management, both corporate and entrepreneurial. For the last 18+ years, he has operated The Hallman Company, a retail consultant agency based in Atlanta, Georgia. The Hallman Company specializes in bringing best-of-class services to best-of-class specialty retailers. Services include inventory planning with pre-calculated open to buy, and team management training.
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