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Inventory sales: What you need to know

If you own a small retail business, you know that every product you store and every square foot of your sales area is important to the bottom line. At the end of each month, quarter or fiscal year, the amount of earnings shown on your balance sheet reflects the products you have offered for sale, the value of these items in proportion to the cost and the speed with which you could achieve this. these products in your shop and in the hands of your customers.

Given that inventory management has such a huge impact on the long-term success of retailers, it is surprising that few retailers have the right system to track stock movements.

What is the turnover of the inventory?

In simple terms, inventory turnover is the measure of the number of times that stocks are sold or used in a given period of time, usually a year.

How do you calculate the turnover of the inventory?
Accountants calculate inventory sales using this formula:

Inventory-to-sales Formula 1

This of course means that in order to calculate the sales of your inventory, you must first determine your sales costs and your average inventory …

What exactly is it again?

Cost of goods sold (COGS)
These are the direct costs associated with the production or purchase of products sold to a consumer. This includes the material costs and the time required for the manufacturers. For a trader who does not manufacture his own products, it is simply the purchase price of the products obtained from a wholesaler or a manufacturer.

Let’s look at some examples of cost calculations for products sold:

For a jewelry designer, the cost of the products sold includes the purchase price of the materials, such as the thread, the beads or the ornate jewels, the precious metals, the staples, or any other material that will be included in the final product. It will also include the cost of the work required to make individual jewelry.
For an electronics store, where no electronic equipment is likely to be produced, the cost of the products sold would be merely the wholesale price of all inventories sold in a given period of time.
Keep in mind that the method of calculating the cost of products sold depends on whether your company buys products from a wholesaler or manufactures its own products. For the purposes of calculating total cost of ownership, whether your products are sold to a retailer or directly to the consumer, the cost of the products sold is the same.

Remember that although your business has many expenses, not all should be included in the cost of the goods sold. Things like rent for your sales area, labor costs for your sales force or tools and equipment should not be included.

Average stock

The good news about calculating your average inventory? Once you have determined the cost of the goods sold, you have already done most of the work!

In fact, the only difference between these numbers is that the cost of goods sold reflects the cost of acquiring or buying items already purchased by a consumer, while the cost of stocking the items you own is always the same still (or not yet sold).

So, to calculate the value of your inventory, use the same calculations as above – the purchase price of a wholesaler or materials plus labor when you make your own products – and apply them to inventory maintenance sometime internally.

However, keep in mind that the amount of inventory that you have at the same time can vary considerably.

For example, the total value of your available inventory will change dramatically just before or after receiving a large shipment of new inventory. That’s why accountants calculate the average inventory – to get a better idea of ​​the average inventory held by your business at a given time.

Use this formula to calculate your average inventory for a specific time period:

Inventory-to-sales Formula 1

The meaning of the period

Depending on the reason for which you calculate your inventory turnover, you can use your inventory measurement at different times. One year is the norm, but in some cases you can calculate the rotation of your stock for a specific month or even a specific week.

Regardless of the length of time you spend, it’s most important that you use the same data for your sales costs as your average inventory. Otherwise, you will not compare apples to apples, and your inventory scoring calculations will not accurately reflect what’s happening to your business.

Identify the period of time you want to use and then calculate the cost of your sold products and your average inventory with the same start and end dates for each period.

Ideal stock turnover

In general, the general rule for billing your turnover rate is:

If your inventory turnover is very low, it means that your inventory has to spend a lot of time on your shelves without being sold. This requires a lot of space on the site to meet this inventory, as well as a high risk of damaging the inventory or decreasing its value because consumers do not want it.

Take into account the nature of the product
Apart from this general recommendation, the amount of “normal” inventory turnover can vary considerably depending on the nature of your business and the products you sell.

For example, grocery stores, bakeries, and other companies selling food and other perishables must have the highest inventory turnover because their products disintegrate much faster than designer shoe stores. A gallon of milk is for sale for about a week or less, while a pair of shoes can stay on the screen for weeks or even months and retain its value.

Too much of a good thing

In fact, non-perishable products may experience too much stock turnover.

On the one hand, high inventory turnover can lead to high sales volumes, but on the other hand, it can also mean that you do not have enough stocks in stock to meet demand. Back to the footwear business for example – selling new supplies from a particular shoe brand the same day they arrive at the store clearly means that you have to order larger shipments for each product. It’s a good problem, but always something to watch out for!

5 ways to apply the inventory turnover rate
When we talk about a figure that can easily be charged with a cocktail napkin and has no particular ideal to achieve, you might be wondering … Why is the stock turnover that way? important for my business?

Let’s take a look at the different ways you can use the inventory ratio to improve your business!

1. Total sales

The first number you want to calculate is your total revenue for your business. In general, it’s a good idea to start with an overview of your business for a full year and then zoom in on specific products or periods.

If you use accounting software such as Quickbooks, Freshbooks, or Wave to track your company’s finances, your balance sheet should include a section on the value of inventory and cost of goods sold. If you kept these sections exactly, it should be easy to calculate your total sales for the past year.

Keep in mind that when calculating the total sales of your inventory, it may not be fully representative of your company’s inventory sales in various product categories or during a month or season. That’s why it’s important to look more closely at specific areas of your business as your inventory changes.

2. Sales by product or category

Which products in your store are sold faster than you have in stock? Which inventory is on your shelves for months and only takes up space? Should you order more green dresses next month or save room for blue skirts on the shelf?

These are the questions you can answer by calculating inventory sales for specific categories or items in the parent schema of all the shares you sell. By collecting data on the most popular and least popular products in your store, you can make smart decisions about which items to sell or discount on and which products to buy or make later.

3. Seasonal sales

If you own a ski and snowboard equipment store or a designer swimwear store, you probably know the ups and downs in sales volume during the peak and mid season for your business. For these companies, it can be very misleading to rely on an average inventory turnover rate over the course of a year, which means you have too much stock in the slowest months and then sell it quickly.

Instead, use shorter periods, eg. For example, a quarter or even a month to calculate the amount of inventory you need in your “high season” and to ensure that you do not over-accumulate excess products. Dust during your off season. It’s important to keep a close eye on the months at the beginning and end of your busiest season to make sure you have the right amount of inventory when you need them.

4. Product category and season together

Even if your business is not only seasonal, you can combine the inventory calculation by product or category with seasonal inventory rotation calculation to determine how much product to store in a given time period. This allows you to customize your order or production based on your customers’ seasonal preferences.

For example, if a clothing store gets a new jersey shipment in June, this inventory will likely take a long time at the store. Consumers will not want to buy the jerseys before the cold recurs. And even then, there is a risk that trends have changed and that sweaters arriving in June will go out of fashion in November.

5. Using Inventory Revenue to analyze marketing or product placements

Some of the above options might have been obvious. But did you know that you can even use the inventory turnover rate to analyze how your marketing efforts are working and where you place the items in your store?

For example, identify a product in your inventory that has been experiencing low sales for a period of time, resulting in a significant amount of excess inventory in the inventory. Try positioning the location of this product in your store, for example, at the end of a driveway or nearer to the register. Or maybe you can get a certain necklace from a shirt that you marry? Then wait a month and compare your sales for this product this month with the same number for the last month. Did the move make a difference?

Also, consider running an online ad or buy-one-get-one special offer for the stock you own. Using the same methods as above, you can make a before / after comparison of your inventory turnover rate. This will help you determine which ad channels or promotions are best for your audience.

How to improve inventory turnover for your small business
Now that you know what the inventory turnover is, how it’s calculated, what kind of results you’re looking for, and how you can apply that ratio to different areas of your business … your next question will definitely be this: How can you change it? ? ?

If you have calculated the sales of your stock and you do not like the numbers displayed either as a whole or in another product or in another season, here are some tips for optimizing your inventory.

Conservative order

This happens to every business owner from time to time. A supplier continues to talk about how it is the product of the year or how it will never again be so low prices. If you do not act now, you can not take this opportunity! How about if you would increase your order by only 5 or 10%?

Unfortunately, the first and most common reason for low inventory turnaround is to order or produce more product batches than you can sell. Although you never want to order so few products that your shelves are empty, it is in your interest to give up precautionary orders, especially for a new product you have never offered. While it may sometimes be true that the added value of a special reduced rate is not met, this risk is much lower than the risk of overstocking and lowering the price beyond profitability.

Move things

As mentioned earlier, you may be surprised how the location of a factor can affect the speed with which consumers choose to buy their products. Identify products that can be “impulse buys” for your customers and move them to the high-traffic areas of your business. You can apply the same principle to your retail website by offering a specific product on your homepage or even by enlarging a particular product image and making it more visible in a section.

When you make a difference, look at your turnover rate before and after the change to make it easier to see what works and what does not.

Consider complementary products

In the same vein, look for products that could be linked naturally. Would your homemade jelly be more popular if you also sell peanut butter? Could you show items that would bring good gifts closer to your greeting cards or wrapping paper?

Stroll through your store or browse your website with fresh eyes and think about what’s missing. If you feel like “if you only …” your customers might feel the same way.

You might even consider using a focus group or an objective third party because they may notice something you have missed!

Pay attention to the seasons

For the purpose of stock turnover, storing a particular product is just as important, if not more than what you want to store! No matter how good your new pool toys are, no one will buy them in November unless you live in Florida.

And while this example may seem a little obvious, other products or specific months may be a bit more complicated. Should you order the last coat of winter coats before Christmas or after? Will customers get spring dresses in March or April? If you make the wrong decisions here, you can miss out on a chance at your target market or even have a surplus of stocks until next winter! And with the dramatic changes in weather conditions, we’ve seen in recent years that even the biggest mega-retailers can be left out.

Even though you’ll never be able to predict the weather, using historical year comparisons of inventory envelopes for specific products in specific months will help you find the right products at the right time.

Give marketing a boost

Advertising and marketing efforts are another great way to increase your inventory turnover. By paying attention to products that are to be returned and promoting those products to consumers outside of your business, you get more attention – and additional purchases – for products that could not otherwise be sold.

Use e-mail marketing campaigns to highlight specific products with existing customers, or insert a low-revenue product into a direct mail or online ad. Sometimes just a few eyes on an object that customers may not have understood.

Know when to discount

Of course, offering a discount to retailers is not the first choice for moving inventory. After all, your turnover rate is not as important as your profit margin!

Well, let’s think about it for a minute. If the inventory is long in your store, it takes up space. This space could be used for other assets that are better adapted to your customers’ needs and evolve much faster. If you keep this old inventory, you might miss the opportunity to sell another product multiple times! In this sense, it probably looks much more interesting to offer a 25% discount or an immediate purchase of an old stock.

More you know

As I said, the first step is to admit that you have a problem – and that’s the stock turnover. It helps identify problem areas in your inventory so you can take steps to improve your sales as needed.

We hope that these steps will help you make better decisions for your company’s inventory in the future, resulting in better sales and long-term business success!

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May 2019
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