As a retailer, you know how important your key performance indicators (KPIs) can be in helping you determine if your business is having a successful and profitable year. If you’re using an advanced POS and inventory management system, you have access to a lot of data that can help you determine just how well your business is doing.
Return On Investment (ROI) is arguably the most revealing indicators of how your entire operation is performing. Let’s look at how understanding ROI can help you make better decisions for your business.
What it means
ROI is the measure of how many dollars of gross profit or margin you are getting back for each dollar you have invested in inventory (based on your present rate of sales and average inventory for the period). This ratio can be shown as a percentage (175%) or as a dollar amount ($1.75).
How to find it
ROI = Profit during Sales Period/Inventory Cost over Sales Period * 365
Why it’s important
ROI is an important tool that analyzes inventory levels, sales, and profitability by comparing the investment in inventory required in order 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.
Things to consider
ROI is an annualized number. The formula shown above indicates an ROI calculation for one day, which is why you multiply by 365. If you were calculating your ROI based off of 1 month of data, you would multiply by 12. RICS Software considers this ratio to be the most important and best overall indicator of performance in your store. It takes into consideration how quickly your inventory was sold, how much inventory you carried to generate those sales, and how profitable the sales were when they occurred. This is an excellent comparative tool because it may show that SKUs, classes, suppliers, etc. with the highest sales, or the highest GP%, or the highest turnover rates, are not necessarily your best performers.
To learn more about using your KPIs to improve your business, download our 5 Data Points You Need to Know guide.