One of the September’s blogs here talked briefly about inventory turnover and turn rate. Turnover is the rate at which you sell the products in your inventory. To calculate this rate, take your cost of goods sold divided by the average inventory cost (what you paid for it) for the period you’re examining (more on that in a bit). Average inventory is calculated by adding your current inventory cost and the last period’s inventory cost and dividing by two.
To give an example, let’s say your cost of goods sold over the last year—a number you and your accountant will have determined on your income statement—is $350,000. If your average inventory for the last year was $125,000, then your inventory turns ($350,000 divided by $125,000) are 2.8. That means you have turned your inventory 2.8 times during the year. The higher the number, the more profitable you will be.
This turn rate is a good place to start analyzing how your business is doing, and you should calculate it every year you’re in business. It’s an important metric by which to judge your growth each year, as well as a strong indicator of how “right” you’ve gotten the mix of products in your store. In fact, it’s rather one of the best starting points for examining many of the factors that affect your business.
Let’s say you saw the early summer USFWS report that said waterfowl numbers were going to be up in your flyway, so you stocked up on lead-free shotgun ammunition. But a look at your year-end counts showed you still had a lot of cases left in your inventory.
This leftover inventory could have been the result of a number of things. Maybe you didn’t take into account that your store was a considerable distance from most of the duck hunting hot spots in the state. Maybe you were anticipating large shot-size goose loads were going to be the seller, when most of your customers were actually after teal and woodies—did you talk to your customers, get a feel for what they were after, or were you following what you thought they’d be hunting? These types of things can be realized only with hindsight and a thorough look at not just the turn ratio, but the things inside and outside your store that affected your buying decisions and sales throughout the inventory evaluation period.
There’s yet another reason to look at your turn rate. Using the same waterfowl ammo scenario, let’s say you took your inventory count at the end of the waterfowl season and your non-lead shotshell supply is depleted. Good for you, right? It’s easy to pat yourself on the back when the product you ordered to fill the needs of a particular season sells out just as the season ends, but unless you look at the turn rate behind that “sell-out,” you’re never going to know if you actually profited. For instance, perhaps you ordered your stockpile of non-lead shotshells in June, because you got a deal on a bulk order you just couldn’t resist—or was it? You had to carry that inventory, likely all of it, in your warehouse for months before it started to sell. Your turn rate will reflect that, and now that “deal” you got back in June doesn’t look so good, does it?
Next time we’ll talk about number of days to sell and how you analyze these numbers to fit the issues of seasonality in the firearms retail business.