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Laurie Owen: Profits Lost

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Don’t let your excess inventory gather costs, warns Laurie Owen.

{loadposition laurieowenheader}

[h3]Profits Lost[/h3]

[dropcap cap=W]hile I’ve yet to see a profit-and-loss statement with an expense category called “hidden costs” at any company that is carrying more inventory than it should, hidden costs surely exist.[/dropcap]

Also known as carrying costs, they represent expenses related to paying for and then maintaining inventory. The bottom line? Your extra inventory may be gathering more than just dust. It’s also picking up hidden costs that can put a severe ding in your profits.

Learning just how high these hidden costs can be is a real incentive to trimming the excess. Leading logistics and accounting experts place the cost of carrying inventory between 25 percent and 55 percent a year depending on the products and business.

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What makes up inventory-carrying costs? The most common include:

• Storage space (2%-5%) — Whether it’s your safe, cases, drawers or whatever, you’ve got to put it somewhere, right? A certain jeweler we know gained more than 1,000 square feet just by winnowing down the gift lines he carried (along with all the accompanying gift boxes) to the top three.

• Insurance (1%-3%) — Got stuff? Must insure.

• Taxes (2%-6%) — Have assets? The government wants its share.

[inset side=right]The value of carrying the right inventory — products that turn quickly and at a good margin? Priceless.[/inset]• Physical handling/clerical/inventory control (4%-10%) — Inventory must be counted, cleaned, accounted for, put in cases, taken out of cases. Someone’s got to do it, someone’s got to pay them.

• Obsolescence (6%-12%) — It looked so good in the buying room. Your jeweler buddies told it was a sure sell. You had to carry it in all colors and sizes. And it’s still with you three years later. Because of the emphasis on fashion in the jewelry industry, I’m guessing you’re at the high end of the range.

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• Waste, theft, spoilage (3%-6%) — OK, you’re not in the food business, so your old dogs don’t actually smell. But they do get damaged, and they certainly get lifted occasionally despite your best efforts. As inventory is handled and moved, it gets damaged and scraped. Shipments come in short but the error isn’t caught until weeks or months later. Pricing errors occur, or the wrong inventory is taken out of display or put into storage. The more stuff you have the more likely all this is to happen.

• Financing (6%-12%) — This is the biggie. Also known as the cost of money, it includes financing the acquisition of the inventory. Don’t forget the lost opportunity cost of what you could have used that money for instead of buying inventory that just sits around.

The grand total? 25 percent to 55 percent. Let’s say that you’re carrying $100,000 too much inventory. Take even the low end of the hidden-cost range times that excess inventory and you’ve got $25,000 less in profits per year.

Here’s another way of looking at it. Remember that piece you bought four years ago that you finally sent home with a customer last month? Four years times 25 percent means no profit at all.

The value of carrying the right inventory — products that turn quickly and at a good margin? Priceless.

[componentheading]MONEY MATH[/componentheading]

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[contentheading]Is Excess Inventory Costing You Too Much?[/contentheading]

Here’s a formula to find out the hidden costs.

Take the amount of excess inventory and multiply it by the carrying costs of inventory. Accounting and inventory experts peg it as low as 25 percent and as high as 55 percent. Let’s say you’ve got $150,000 too much inventory. $150,000 x 25% = $37,500 in hidden costs per year.

[componentheading]MONEY MATH[/componentheading]

[contentheading]The Perfect Figure: 1.72[/contentheading]

What is it? Sales to Assets. It’s the amount of sales generated for every dollar invested in total assets (cash, inventory, accounts receivable, and other current and long term assets) by the top 25 percent in the 2005 FIT Jewelers Financial Benchmarking Study. The top 25 percent represents those companies earning the highest owners’ discretionary profit percentage.

 


 

Laurie Owen is senior vice president at Business Resource Services. Contact her at [email protected].

[span class=note]This story is from the February 2007 edition of INSTORE[/span]

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SPONSORED VIDEO

Wilkerson Testimonials

If It’s Time to Consolidate, It’s Time to Call Wilkerson

When Tom Moses decided to close one of the two Moses Jewelers stores in western Pennsylvania, it was time to call in the experts. After reviewing two candidates, Moses, a co-owner of the 72 year-old business, decided to go with Wilkerson. The sale went better than expected. Concerned about running it during the pandemic, Moses says it might have helped the sale. “People wanted to get out, so there was pent-up demand,” he says. “Folks were not traveling so there was disposable income, and we don’t recall a single client commenting to us, feeling uncomfortable. It was busy in here!” And perhaps most importantly, Wilkerson was easy to deal with, he says, and Susan, their personal Wilkerson consultant, was knowledgeable, organized and “really good.” Now, the company can focus on their remaining location — without the hassle of carrying over merchandise that either wouldn’t fit or hadn’t sold. “The decision to hire Wilkerson was a good one,” says Moses.

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Laurie Owen: Profits Lost

Published

on

Don’t let your excess inventory gather costs, warns Laurie Owen.

{loadposition laurieowenheader}

[h3]Profits Lost[/h3]

[dropcap cap=W]hile I’ve yet to see a profit-and-loss statement with an expense category called “hidden costs” at any company that is carrying more inventory than it should, hidden costs surely exist.[/dropcap]

Also known as carrying costs, they represent expenses related to paying for and then maintaining inventory. The bottom line? Your extra inventory may be gathering more than just dust. It’s also picking up hidden costs that can put a severe ding in your profits.

Advertisement

Learning just how high these hidden costs can be is a real incentive to trimming the excess. Leading logistics and accounting experts place the cost of carrying inventory between 25 percent and 55 percent a year depending on the products and business.

What makes up inventory-carrying costs? The most common include:

• Storage space (2%-5%) — Whether it’s your safe, cases, drawers or whatever, you’ve got to put it somewhere, right? A certain jeweler we know gained more than 1,000 square feet just by winnowing down the gift lines he carried (along with all the accompanying gift boxes) to the top three.

• Insurance (1%-3%) — Got stuff? Must insure.

• Taxes (2%-6%) — Have assets? The government wants its share.

[inset side=right]The value of carrying the right inventory — products that turn quickly and at a good margin? Priceless.[/inset]• Physical handling/clerical/inventory control (4%-10%) — Inventory must be counted, cleaned, accounted for, put in cases, taken out of cases. Someone’s got to do it, someone’s got to pay them.

Advertisement

• Obsolescence (6%-12%) — It looked so good in the buying room. Your jeweler buddies told it was a sure sell. You had to carry it in all colors and sizes. And it’s still with you three years later. Because of the emphasis on fashion in the jewelry industry, I’m guessing you’re at the high end of the range.

• Waste, theft, spoilage (3%-6%) — OK, you’re not in the food business, so your old dogs don’t actually smell. But they do get damaged, and they certainly get lifted occasionally despite your best efforts. As inventory is handled and moved, it gets damaged and scraped. Shipments come in short but the error isn’t caught until weeks or months later. Pricing errors occur, or the wrong inventory is taken out of display or put into storage. The more stuff you have the more likely all this is to happen.

• Financing (6%-12%) — This is the biggie. Also known as the cost of money, it includes financing the acquisition of the inventory. Don’t forget the lost opportunity cost of what you could have used that money for instead of buying inventory that just sits around.

The grand total? 25 percent to 55 percent. Let’s say that you’re carrying $100,000 too much inventory. Take even the low end of the hidden-cost range times that excess inventory and you’ve got $25,000 less in profits per year.

Here’s another way of looking at it. Remember that piece you bought four years ago that you finally sent home with a customer last month? Four years times 25 percent means no profit at all.

The value of carrying the right inventory — products that turn quickly and at a good margin? Priceless.

Advertisement

[componentheading]MONEY MATH[/componentheading]

[contentheading]Is Excess Inventory Costing You Too Much?[/contentheading]

Here’s a formula to find out the hidden costs.

Take the amount of excess inventory and multiply it by the carrying costs of inventory. Accounting and inventory experts peg it as low as 25 percent and as high as 55 percent. Let’s say you’ve got $150,000 too much inventory. $150,000 x 25% = $37,500 in hidden costs per year.

[componentheading]MONEY MATH[/componentheading]

[contentheading]The Perfect Figure: 1.72[/contentheading]

What is it? Sales to Assets. It’s the amount of sales generated for every dollar invested in total assets (cash, inventory, accounts receivable, and other current and long term assets) by the top 25 percent in the 2005 FIT Jewelers Financial Benchmarking Study. The top 25 percent represents those companies earning the highest owners’ discretionary profit percentage.

 


 

Laurie Owen is senior vice president at Business Resource Services. Contact her at [email protected].

[span class=note]This story is from the February 2007 edition of INSTORE[/span]

Advertisement

SPONSORED VIDEO

Wilkerson Testimonials

If It’s Time to Consolidate, It’s Time to Call Wilkerson

When Tom Moses decided to close one of the two Moses Jewelers stores in western Pennsylvania, it was time to call in the experts. After reviewing two candidates, Moses, a co-owner of the 72 year-old business, decided to go with Wilkerson. The sale went better than expected. Concerned about running it during the pandemic, Moses says it might have helped the sale. “People wanted to get out, so there was pent-up demand,” he says. “Folks were not traveling so there was disposable income, and we don’t recall a single client commenting to us, feeling uncomfortable. It was busy in here!” And perhaps most importantly, Wilkerson was easy to deal with, he says, and Susan, their personal Wilkerson consultant, was knowledgeable, organized and “really good.” Now, the company can focus on their remaining location — without the hassle of carrying over merchandise that either wouldn’t fit or hadn’t sold. “The decision to hire Wilkerson was a good one,” says Moses.

Promoted Headlines

Most Popular