Retailers ... It's Your Turn
Most of us are familiar with The Byrds’ 1965 hit “Turn, Turn, Turn.” It was a welcomed and needed message of reason when the country was entering a time of division. It’s also one of those tunes that sticks in your head, even if – no, especially when – you try to ignore it. (If that happens to you after you finish reading this article, I apologize.) Actually, I’m hoping that, if you own a retail business – or any other business that inventories stock – you never forget that recurring phrase “turn, turn, turn.”
The term “turns” refers to stock turnover – the number of times a company replenishes its stock during a twelve-month period. The more turns, the less time inventory sits in a warehouse or on the shelves. The less time it sits, the more cash it generates.
Turn Style
You can look at turns as being indicative of a retail operation’s well-being, and if sales are the lifeblood, then turns are the blood pressure readings. For many years, retailers have used the Retail Method of Accounting in order to calculate their turns. This method adds the beginning retail value of your inventory to the retail value of your purchases then subtracting the retail value of the ending inventory, then divided that value by your total sales. [(Beginning Retail Value + Retail Value of Purchases – Retail Value of Ending Inventory) / Total Sales]. Although this was useful, it was not necessarily accurate. It was, however, a relative easy method to use when contrasted to the Cost of Goods Sold Method. The problem with the Retail Method of Accounting method is that it assumes that nothing you sell will be discounted, wasted, or stolen.
The Cost of Goods Sold Method is a much more accurate system and is well worth the time and effort. With it, you can more accurately access the progress – or decline – of your business. This method is determined by [(Beginning Inventory at Cost + Purchases at Cost - Ending Inventory at Cost) / Cost of Sales]. If you want to be extremely accurate, allow for waste and shrinkage. To include these numbers in the equation use the following calculation: [(Beginning Inventory at Cost + Purchases at Cost - Ending Inventory at Cost – Cost of Goods Lost) / Cost of Sales].
Turn And Save
The major goal is to turn your inventory as often as possible without running out of stock. As for what is the most beneficial number of turns for you, that depends on several factors, including what industry you are in and how often the goods are available. But no matter what business you are in, if you can efficiently turn your inventory more often than your competitors, you will have more sales-based capital, allowing you to market more effectively, add employees if needed, and buy more inventory without dipping into cash reserves.
Let’s take a look at how this works. Let’s say you had $500,000 of sales last year with an average inventory of $250,000. Then you had two turns, and it theoretically cost you $250,000 to pay for the year’s inventory, based on using the sales of the $250,000 of inventory to pay for the second $250,000 worth. However, if you could increase your number of turns to five, you could now reduce your inventory investment to only $100,000. The $150,000 saved can go to other areas, such as marketing, where it can be much more beneficial.
You may be thinking that buying in bulk with less turns saves money, and you may be correct … in a relatively few instances. More often than not, however, you would do better to purchase less, pay a bit more, and have cash reserves available to use elsewhere. Furthermore, purchasing large quantities can turn inventory from what is usually considered to be an asset into a liability. Of course inventory is always an asset on your books, but if your product is not as saleable in future months, you may have to discount or liquidate it, causing what was already an unnecessary outlay of cash to be even less valuable.
To help increase your net profits, get your turns where they are most beneficial. Use this very valuable weapon to outmaneuver your competition. And always remember the words in The Byrds’ hit, “To everything, turn, turn, turn / there is a season, turn, turn, turn.”
