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Thursday, May 31, 2012

Inventory Turns

Inventory Turns

In the past I spoke to you about inventory turns. Like I mentioned then, it is important that you sell through your merchandise fairly often. How often you need to turn through your inventory to be profitable is pretty much industry specific. There is no one set rule of thumb for this.

In a small store, like a convenience store you really want to sell through your inventory at least once per month.  Some businesses can get by with fewer turns than that. The big thing here is to study your industry and determine what seems to be the industry standard. If that information isn’t available, then your best bet is to simply do your best to turn your inventory as rapidly as possible.

To calculate how often you are turning your merchandise you use the following formula:

Inventory Turns = Sales/Average Inventory
To determine average inventory you can take your inventory at the end of one fiscal year and add it to the inventory at the end of the next fiscal year and divide by two. If your company takes an inventory each month, then simply add up the inventory amounts for each month and divide it by the number of months you have figures for.

If your inventory on December 31, 2010 was $100,000 and on December 31, 2011 was $150,000, you simply add the two together and divide by two.
=$100,000 + $150,000
In this example the average inventory is $125,000. 

Let’s say that sales for the year are $750,000. To get our number of turns for the year, we simply divide our sales by our average inventory.
Inventory Turns =Sales/Average Inventory
= $750,000/$125,000
This means that we are turning our inventory six times per year. This figure does not mean that you are selling everything completely out six times per year. You will still have to look to see what items are not moving as fast as this. You may wish to mark the slow moving items down and discontinue them. You may want to add more variety of your faster moving items to make even more sales. Calculating inventory turns is a tool. Use it wisely.

Can you think of a time when you had that one terrible item that just would not sell?  For us at the Western Auto in Iva it was a doughnut maker. We bought it as part of the opening inventory and finally, ten years later, we gave it away. No one wanted that doughnut maker. 

The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.
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