Money Matters

Inventory turnover – how to find it?

I'm DeAnna!

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Guest Post by Darlene Mitchell – Inventory Expert and Owner of Darlene Y Mitchell.

Let’s chat about inventory turnover…

Inventory turnover (or inventory turn for short) is how many times the average inventory has been sold during a specific time. It measures how frequently product is moving in and out of your store. Usually reviewed on an annual basis.

It measures the efficiency and freshness of your product assortment.

It tells you the health of your inventory.

The bottom line: Inventory turnover is how quickly your product is turning into CASH.

inventory turnover formula

So, inventory is like avocados.

When you buy avocados, you think about what you’re going to use them for, how many you need and when are you going to use them.  So, you buy varying ripeness.

If you buy too many inevitably one is going to be too mushy and you just wasted your money!

Stop thinking about guacamole, come back to me!

Inventory turnover formula = Net sales / average inventory

For a fashion business, your inventory turnover ratio should be around 4 or 5.

But not all categories need to be at the same turn – fast fashion should turn well… faster, and basics can turn a little slower.

Why am I going on and on about inventory turnover, when you just want to know “How much inventory do I need to buy for my boutique?”

Here’s why:

Faster turning inventory puts cash in your bank account faster.

How you ask?

  • By lowering expenses of cost of goods sold (COGs), warehouse space, brick and mortar store rent (smaller store), insurance and taxes.
  • By having fresh inventory that draws your customer back more frequently.
    • And if you have the right product at the right time the will be buying more frequently. Yep, that’s means your retail sales increase!

Conversely, slow inventory does the opposite.

how much inventory to buy for my boutique
  • You miss your sales goals because you are selling inventory at a discounted price.
  • Your cash is tied up in unproductive inventory, so you are not buying new, fresh, merchandise.
  • You have lower store traffic because your customers come to you and keep seeing the same thing over and over.  Your inventory is not fresh, so why come back?

You need to have an inventory management plan, because without one, you could turn too fast, which causes broken sizes, stock outs and ultimately, customer dissatisfaction.

Yep, there is a science to balancing the right amount of inventory.

Ok, next up, sell thru rate.

Sell thru (or through) is how fast a product is selling.

It’s the percent of inventory sold at any given time, used to evaluate performance.

Sell thru rate formula (S/T%) = Sales Units / Beginning on hand inventory

Sell through goals vary by product, but in general, a sell thru rate of 10% a week is very good for fashion goods, which is about 10 weeks of supply.

This is a good guide, but your target sell thru rate depends on your product type and the product’s seasonality.

So, how much product do you need for your online store or brick and mortar boutique?

  • You need to determine the correct inventory turn that is consistently turning your product to cash.
  • You need an optimal sell thru rate that ensures your product is productive.

How do you do determine your inventory turn ratio goal and sell thru rate goal?

You determine these by creating:

  • Sales and inventory plan
  • Product Assortment plan

Then you hit those sales and inventory goals by providing the customer with:

  • Compelling price points
  • Enticing marketing and promotions

Your inventory is usually about 50% of your retail store expenses – it ties up a lot of cash.

Inventory is your biggest asset.

How you manage your inventory and invest in more inventory is so important. If you are not turning it into cash regularly, you will not be in business long.

For my clients I am looking at this at the total level, by category, by vendor and size. The numbers tell the story of your business.

A Note From Darlene To You.

I love everything about retail! I’ve been in the retail industry for 20+ years, many of my years were in corporate retail in leadership roles of merchandise planning, demand planning and allocation for some of the most world-renowned retailers. I later leveraged those skills in my own boutique. I specialize in the financials of running a retail business. I create financial and inventory management strategies that put cash in the bank for my clients.

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Hi, I'm DeAnna.
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Business as we know it has been forever changed - but with change, comes so many great things. Innovation, being one of the greatest. Some of today's most incredible companies were birthed during some of the toughest times in history (Instagram, Disney, IBM). Why? Because when there is pressure, when things around us seem to be out of our control and it feels that there's no way out - the curious Entrepreneurs like you find a way.

I spent 10 years working inside the corporate offices of some of the US's biggest retailers, as a Buyer, Strategy Manager, Merchandising Director, Logistics Analyst, Merchant. Fast forward to today, my team and I are the driving force of innovation and revenue behind small and midsize creative and retail businesses like yours.

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