Knowing your turn ratio is one thing, but understanding how to use it is another.
You may have a good grasp of stock turn and how to calculate it, but here are a few significant facts that may affect how you look at it.
1. Stock turn is only one part of the return on investment equation. The other is margin. You can afford to have your inventory sit around a while if you have the profitability to handle it. The lower the margin on an item, the faster you have to turn it over to achieve the same profit.
2. Freight needs to be part of the equation. All too often, I see jewelers who don’t add freight in as part of the cost of the item. The problem with leaving it out is that the faster your stock turn, the more it will cost you as each item gets shipped. Ignoring it will distort the profit on your product and give you an artificially higher margin than you really have.
3. Fast stock turn can be as bad as slow. If your inventory is turning over too quickly, don’t celebrate — it is possibly a sign that demand is beginning to exceed supply and you will be losing sales as a result of this.
4. Accurate stock turn can only be measured over time. Take a snapshot of a week or a month and the figures can deceive you. Stock turn is calculated using your average inventory holding between two periods. If those periods are seasonal, such as December, the numbers can deceive if you don’t take this into account.
5. Stock turn can predict the future as well as show the past. Too often, I see retailers who analyze their stock turn but don’t use it as a basis of prediction. History does repeat, and if you find trends developing around certain areas, it helps to use them to plan future inventory levels across that area.
An awareness of stock turn is one thing, but knowing how to manage it and use the information to drive your business is the secret to getting the most value from this key financial variable.
DAVID BROWN is president of the Edge Retail Academy. To learn how to complete a break-even analysis, email@example.com or (877) 569-8657.
This article originally appeared in INSTORE.