You Can’t Sell it if you Don’t Have It

A huge part of retail success is having the right product in the right place at the right time for the right price. There’s nothing more upsetting than being out of stock when a customer is ready to buy. My last post has you working on your inventory system so let’s take a deeper dive into Inventory Turn.
Inventory Turnover tells you how many times during a specific period you sell and replace (turnover) your inventory. It tells you if you are over or under stocked. Controlling your inventory turnover helps you keep your shelves stocked so you don’t miss sales. It keeps the cash flowing. In general a higher turn indicates merchandise is moving and business is good.
In general you will need to have 25-45% more items in inventory that you would need to meet your sales goal. For example, if you need to sell 10 hoof picks to meet your hoof pick sales goal this month, you will need to have 25-45% more hoof picks (roughly 13 - 15 total hoof picks) to meet this goal.

You can calculate your inventory turn by total company (all stores if you have multiple locations), individual store, category, brand and/or item. Depending on what you want to know you can select one of these calculations or a group.

Inventory Turnover = COGS (cost of goods sold)/Average Inventory
COGS = Beginning Inventory + Purchases – Ending Inventory (NOTE: Use wholesale costs plus any shipping and handling you have paid. Subtract any cost of lost, stolen on unsalable items.)
Average Inventory = Beginning Inventory + Ending Inventory/2

Days Inventory Held = Days in the Accounting Period/Inventory Turnover Ratio
Here’s an easy example for a store in a 30-day period using the following figures:
Beginning Inventory: $10,000
Ending Inventory: $20,000
Additional Purchases: $50,000
Days in period: 30

COGS: 10,000 + 50,000 – 20,000 = 40,000

Average Inventory: 10,000 + 20,000/2 = 15,000

Inventory Turnover Ratio: 40,000/15,000 = 2.67

Average Days held in Inventory: 30/2.67 = 11.24
With these numbers, you have an inventory turnover ratio of 2.67 and are holding your inventory for about 11 days.
Let’s see what happens when we increase our Additional Purchases to $70,000

COGS: 10,000 + 70,000 – 20,000 = 60,000
Average Inventory: 10,000 + 20,000/2 = 15,000
Inventory Turnover Ratio: 60,000/15,000 = 4
Average Days held in Inventory: 30/4 = 7.5
You can see the higher inventory rate decreases the average number of days that items are in store, ie. you are selling items faster.
Let’s also take a look at the simple hoof pick example from above using these numbers:

Beginning Inventory: $50 (10 picks @ $5/ea.)
Ending Inventory: $15 (3 picks @ $5/ea.)
Additional Purchases: $25 (5 picks @ $5/ea) NOTE  - Assume you have purchased 45% more than you need which is 14.5, or rounded up 5 more picks to sell 10.
Days in period: 30
COGS: 50 + 25 – 15 = 60
Average Inventory: 50 + 15/2 = 32.50
Inventory Turnover Ratio: 60/32.50 = 1.8
Average Days held in Inventory: 30/1.8 = 16.66 or 17 days

​Knowing how quickly you are selling individual key items will allow you to order enough stock and keep the deliveries on track to make sure you always have them in stock.
Happy turning!
Need help with Inventory Turnover?  Contact: Anne Cecil, ONO made in the 191, [email protected]