INVESTING IN INVENTORY is a game of opportunities. Stores must make choices as it’s normally not possible to buy everything that appeals to you. Today, we talk about two factors that can help you decide what to invest in — stockturn and markup.
When you make a decision to spend $1,000 here or $1,000 there, you have a constant variable — the $1,000. This makes it relatively easy to draw a comparison. The question is a simple one — where can I best spend my money? We have touched before on measuring Return on Investment (ROI) — the return on investing in inventory for a 12-month period.
There are Two Factors That Make This Up:
- Markup (or the percentage you make on one sale)
- Stockturn (or how many times you can make it turn during the 12 months)
It can be a little like the tortoise and the hare. An item that offers, say, a 200 percent markup may look extremely attractive in the short run. Yet if, like the hare, it runs out of steam after the first sale, then the investment isn’t necessarily a good one. Markup is only great if you can make an actual sale.
Stock turn is a little like the tortoise.You may have an item that offers a lower markup, let’s say keystone, but if you can have it sell three times during the year, then results are comparatively better. It may be a little slower, but it has the ability to keep performing through the year.
- Hare: 200% markup x 1 stockturn= 200% return on investment
- Tortoise: 100% markup x 3 stock turns = 300% return on investment
Although the hare is offering a better profit on each sale, the tortoise is providing the ability to free up capital more frequently to duplicate the process; therefore a lower return is fine if you can repeat it more often.
So How Does a Jeweler Use This In His Store?
Each time you sell an item, you get the chance to assess its performance and measure the ROI. While ROI is a factor in making the decision, it’s not the only one. If you know you will need cash in the short term you may sacrifice markup and reinvest in inventory that offers a lower return, but which you know will regenerate cash relatively quickly because of a high stockturn.
Stockturn is the time value of your investment and decisions you make now may need to change in the future. You must consider both variables — chasing high-markup product can create a cash-flow crisis if your inventory then becomes “locked in” because of low stockturn.
Give a fair weighting to both variables and make sure you have a balance of both tortoises and hares in your inventory mix to provide balance and cash flow.