Retail Inventory Turnover - Calculate a Healthy Inventory Turn Ratio! - YouTube

Hey it’s Michael here from KORONA again. We’ve  talked a whole lot about inventory management.  

That’s because it’s vital to your small business’s  success. It takes new businesses years to find  

that sweet spot of having exactly the right amount  of each product. After all, too little means your  

customers don’t have what they want and too much  means you’re using up valuable retail space and  

tying up too much retail capital. An important  aspect of the process of inventory management  

is your inventory turnover. So what is  inventory turnover in retail? And how does your  

retail store find the optimal level for your  product line? Let’s cover some of the basics.  

Sometimes referred to as stock turnover, or  simply inventory turn, turnover in inventory  

is measured by taking the number of times  a certain product is sold in a single year.  

By calculating your inventory turnover,  your business will have a better idea  

of overall performance and profitability. It can be done on other timelines (bi-annually,  

quarterly, monthly, etc.) as well. Using shorter  time periods in your calculations may be helpful  

for seasonal assessment. Just be sure that you  use the same time frame for all calculations.  

But what about inventory turnover ratio?  The ratio used to calculate your inventory  

turnover identifies the cycles of a  certain product over a specified time  

frame. Understanding how fast each inventory item  is sold, will help your business operations in a  

number of ways, such as purchasing, costing,  ordering, cash flow, margins, and storage  

There are even more ways that understanding  your inventory turnover can help manage  

your business operations. And when  you break it down to these areas,  

you’ll notice just how important it all is. Ok, so how about calculating it. To calculate  

inventory turnover, divide your total sales by the  average inventory on hand. Average inventory is  

important because the value of your inventory  can change dramatically at any given time,  

thereby not reflecting accurate data. Figuring out  your stock turnover with the average inventory,  

therefore, will provide more reliable results. In order to get your average inventory,  

add the beginning and ending inventory or the  given period of time and divide by 2. For even  

more accurate results, take additional  inventory measurements at various times.  

Add these to the numerator and divide by  however many total counts you completed.  

Once this is completed follow the first  step and get your inventory turnover ratio.  

As an example of calculating this, take a liquor  store. They sell $1.5 million in products for the  

year. If their average inventory came to $500,000  then their inventory turnover would be 3.  

You can also use the costs of goods sold as an  alternative method of calculating your inventory  

turnover. This helps prevent stock turnover  inflation because it takes into account the  

costs of the materials used to produce the item. Costs of goods take the beginning inventory of  

the determined reference time frame and add all  production costs and new purchases made by the  

company. Whatever additional inventory that  is left at the end of the year is subtracted  

and the result is the final costs of goods sold.  This total is subtracted from the total sales to  

get a gross, rather than a net, profit. It’s important to note that calculating  

the costs of goods sold will be different for  different businesses. For retailers who simply  

buy products from a wholesaler that are ready  to be sold, the costs will simply be the price  

of the items. But for those businesses that use  labor to create or finish a product, the labor,  

and any additional materials must also be added  to the costs. You do not, however, include all  

expenses. Rent, sales costs, marketing, equipment,  and others should not be added to this number.  

Now, you might be asking, what is  the ideal inventory turnover rate.  

For most retailers, the optimal range  for your stock turn is between 2 and 4.  

A ratio below this level means that items are  staying on your shelves too long. Storage costs,  

whether they are on your retail shelves or in your  warehouse, are high. It can also be an indication  

that you are pricing items too high, not marketing  well, or have staff underperforming. Use this  

information to help you identify problem areas. It may seem like the higher the inventory turnover  

ratio the better. But getting too high can be  an issue. You may be purchasing products in  

lower quantities than optimal, leading to higher  shipping costs and perhaps out-of-stock products.  

The type of retail also changes optimal  turnover rates. For retailers that sell  

perishable goods, for instance, the  stock turnover should be higher.  

Ok, let’s now talk about how to improve  stock turnover. There are several ways  

to learn from your inventory turnover ratio  and apply it to changes in your business.  

Start by taking the total turnover from your  inventory. This is probably the best place  

to start for retail businesses that haven’t  calculated this in the past. Using some basic  

accounting software makes this easy. Quickbooks  will automatically calculate this for you.  

Next, look at stock turnover by individual  categories or items. Finding your inventory  

turnover ratio for more specific categories  or individual items will give you more details  

into your product performance. This will clearly  identify your most and least productive products.  

You can also look at seasonal items. Many retail  businesses have ups and downs in sales throughout  

the year. Analyzing sales during specific  periods will help you readily identify these  

ebbs and flows. Once identified, calculate the  inventory turnover ratios for various timeframes.  

During slower periods, find ways to move  the stock faster, and during busier times,  

make sure you always have enough on hand. Finally, get more advanced. Once you start  

piecing more and more data together you can  use the information to analyze much more.  

For example, if you start a marketing campaign,  measure the inventory turn for a few months  

prior to the start of your marketing, as  well as for a few months after. This will  

show you the success of your marketing strategy. Pricing and promotional strategies are other areas  

that can be adjusted by A/B testing different time  periods and measure the stock turnover ratios.  

With the right retail POS system, you can  start better managing your inventory right  

away. Get your inventory consolidated into one  database, whether you have one store or 40. With  

a cloud-based solution, you can also check  this data off-location at any time. Your  

retail store will also benefit from a retail  point of sale that has a great inventory  

management system. It needs to break metrics  down into digestible data points, allowing  

you to take measured action where necessary. Check out KORONA for a powerful POS solution.  

Set up a free trial and demo with one of  our great product specialists. We’ll walk  

you through all the features that can benefit  your small business. And for more retail advice  

on your inventory and beyond check out the rest of  our blog and channel. Thanks for stopping by.