fbpx To adapt to the changes in today’s retail landscape, it is important to back your business decisions with data.  Knowing the right inventory performance metrics to evaluate and what they mean will allow you to make educated business decisions to improve your store’s inventory performance.

Make sure you’re evaluating these 3 important inventory performance metrics:

  1. Look at your Sell-Through – This is the percentage of sales to the inventory investment available for sale. The formula measures how much or what percentage of your total available inventory was sold during a given period. For instance, if you had two items for which you had received 10 pieces of both and had sold 6 pieces of both, the sell-through percent on both items would the same at 60%. But if one of these items had been in your store for 12 months and the other item in the store for 1 month, the second item is much more profitable for your business than the first, even though the sell-through is the same.
  2.  Evaluate the Return On Investment (ROI) of Your Inventory – 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.
  3. Understand the Gross Profit Margin (GP) of classes/SKUs/vendors – GP measures the percentage of your total sales dollars that are profit dollars. The GP percentage is relative to the cost of the item as well as the selling price. A higher GP percentage indicates that you are selling your product as close to the original retail price as possible. A lower GP percentage may indicate excessive markdowns for products driving down profitability.
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.  

Do you want to increase cash flow?

Your cash flow and profitability depend on inventory productivity (i.e., does it sell or not and how fast). If you can improve this value, you can improve the profitability of your store. So, what can you do to improve your inventory productivity?

Analyze product performance

As a general rule, you can improve your cash flow by 1% for every 1 week of improvement you achieve in inventory turns. Turns are the rate at which inventory is sold within a certain time frame. This is an important indicator of how efficiently a product is moving through a sales cycle. You can use turns to discover what 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). On the flip side, slow inventory turnover is an indicator of lost opportunity.

Here’s how to improve your inventory turn rate:

  1. Analyze your turn data at the class, brand, and product levels to identify inventory performance
  2. Mark down stale products to sell them quickly and make room for better-performing products
  3. Invest your cash into high productivity classes, brands, and products
Making these decisions will improve your inventory productivity to increase cash flow. What would it look like if your business could increase overall inventory turn by shaving off just one week off inventory age? Find your potential cash flow increase:

Total number of sales X .01 (1% improvement from 1-week turn increase) = cash flow increase

 

That’s a powerful number! RICS system provides turns, return on investment, and gross margin rate of investment on our sales reports so you don’t have to mess with calculating it yourself.

No more guesswork, no more hunches.

Get control of your inventory to increase cash flow. Need more help? Click below to register for our upcoming webinar or check out our guide, Cash Flow: How To Use Inventory Management to Make More Now.
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