In last month’s article, we discussed diagnosing your business from the point of view of profit and cash flow. This month, we will look at the effect inventory can have on the health of your business.
Inventory management is a lot like food: too much of it can be bad for you, but just as equally, not enough can also lead to health problems for your business. You need more of the stuff that is good for your business and less of the stuff that will sit around your financial waistline like a roll of fat!
There are two key areas that determine how your inventory works for you:
1. Stock turn. You might like to compare this to diet and exercise. In the same way that going to the gym will process more calories, increasing stock turn will allow you to process more inventory. Having the right level of inventory relative to your stock turn is like eating the right level of calories. The more you burn, the more you can have; the less you burn, the less you need. You can choose whether you want to have less stock or increase your stock turn in the same way you can choose between eating less and exercising more. A combination of both works well.
So what are the signs that your inventory is unhealthy? That depends on which department you look at. In the same way that a healthy weight/height combination is different for a 6-foot 4-inch 60-year-old male compared to a 5-foot 5-inch 30-year-old woman, the stock turn for each of your departments will differ. Generally, the higher the item’s price and the higher the margin, the lower the expected stock turn.
Your diamond product, for example, will normally be going well with a stock turn of 1 time per year. Your gold product under $500 might be ideally balanced at 1.5 times per year. Your silver product under $100 or watch selection with lower margin would be best suited to a stock turn of 2-3 times per year. If you are achieving a lower stock turn in these areas, you may have some stock “fatty deposits” sitting around your financial waistline. If your stock turns are higher than this, you may need to increase your inventory “diet” so that you have sufficient fuel to drive your business.
2. Margin. As mentioned, items with higher margins can afford lower stock turns while those with low margin will need to turn their inventory over faster in order to achieve a comparable return on investment. Much like stock turn, margins will differ across categories and departments.
The most effective way to see how your margins are comparing is to view our industry KPI reports, which gather and compare sales data from several hundred stores across the U.S. Contact us at inquiries@edgeretailacademy.com for further information.