We’re all looking for ways to cut expenses.  We’ve posted here before on some tips to trim everyday expenses, but the largest expense item for most retailers is inventory.  How do we reduce inventory expense without hurting sales?  As Bob Negin points out on his Whiz Bang Tips site, that’s the $64,000 question. 

If you have too much inventory, you’re wasting money.  If you have too little inventory, you’re losing sales.  Hitting that happy inventory level that generates the most profits isn’t easy.  One measuring stick is turnover.  If you bought enough inventory on January 1 to last all year, then your turnover would be one (1).  If you bought enough inventory at the beginning of each month to last thirty days, your turnover would be twelve (12).  For most businesses, the ideal figure is somewhere in between.

This chart from Bob’s post gives a rough idea of average turnover rates for various types of stores.



But, turnover isn’t the only metric for retail stores.  It’s important, but it’s not enough.  You have to look at other factors.

For example, take a look at the chart.  If a lumber yard can make 7.7 turns, how can an antique store survive on 1.7′?  There’s another number to consider.  It’s called gross margin.  Here’s a very simple example. 

Let’s say you carry two items, A and B.  You stock just one of each.  They both cost you $100.00.  You can turn item A ten times per year.  You can only turn item B five times per year.  But you sell item A for $125.00 making 20.0% gross margin..  You sell item B for $200, making 50 % gross margin.  Let’s do the math:

item A $100.00 .20 10 $25.00 $250.00
Item B $100.00 .50 5 $50.00 $250.00

If you look only at turnover, item A looks like the better one to carry.  If you look only at gross margin, item B is the winner.  But the reality is that they’re both the same.

You have a lot of money invested in your business.  At the end of the day, you expect a return of that investment.  There are a number of other measurements that you can use to chart your business’ performance, but turnover and gross margin, when used in combination, are a good place to start. 

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