Without data, you don’t have the insight you need to know how your business is really doing.
Understanding and analyzing your data is an essential part of making your business successful. Data utilization can guide your decision-making strategy so you can increase cash flow. So, what data should you measure? A great starting point for using data is inventory productivity. 3 key performance indicators to start with include, Return On Investment (ROI), turns, and gross-profit margin (GP). These three metrics work together and will help you make actionable decisions about your inventory using data.
1. Return On Investment (ROI)
For every dollar you invest in a product, how many are you getting in return. ROI analyzes inventory levels, sales, and profitability by comparing the investment in inventory required to generate those gross margin dollars. A high ROI indicates that you have the right amount of inventory, at the right time, for the right price. A low ROI may indicate that you are missing out on sales opportunities and leaving money on the table in the form of old inventory or excess markdowns.
Turns measure how many times will you sell through your inventory in 1 year. This is an important indicator of how efficiently a product is moving through a sales cycle. You can use turns to find out which products sell most quickly and make you the most money (note: products selling at a faster rate usually sell at full price and higher margins). A low turn rate can indicate you may be overstocked in a product. This is based heavily on how you choose to manage your inventory.
3. Gross Profit Margin (GP)
GP is the percentage of your overall sales dollars that were profit dollars. The GP% is relative to the cost of the item as well as the selling price. A higher GP% can indicate that you are selling your product as close to the original retail price as possible. A lower GP% may indicate excessive markdowns for products driving down profitability.
These 3 metrics will give you an idea of how different aspects of your business are performing. Without the data, it is difficult to accurately know your success. The more insight you have, the better equipped you are to make informed decisions so that you can be a profitable retailer.
Not sure how to start?
Check out our Open-To-Buy webinar featuring Paul Erickson (SVP of Client Services @ RMSA) below.