Inventory That Earns Its Shelf Space
Treat inventory like cash on a shelf: measure how fast it turns, clear what is stuck, and reorder with a plan.
Walk your floor or your stockroom and every box you see is money you already spent. Some of it will sell this week at full price. Some of it will sit until you mark it down 50%. Some of it will still be there next year.
Retailers who stay healthy treat inventory as an investment that has to earn a return. That starts with a few numbers you can pull from your point-of-sale system and your books.
Turns and days of inventory
Inventory turnover equals cost of goods sold for the year divided by your average inventory at cost. Days of inventory is 365 divided by turns: roughly how long an item sits before it sells.
What counts as good depends on what you sell. A grocery or flower shop turns fast; a jewelry or furniture store turns slowly and earns more per sale to make up for it. Compare yourself to your own history and to your category, not to retail in general. And measure turns by department, because a strong average can hide a dead corner.
GMROI
Gross margin return on inventory investment (GMROI) is gross margin dollars divided by average inventory at cost. If that same store made $400,000 of gross margin on $150,000 of average inventory, GMROI is about 2.67: each dollar on the shelf earned $2.67 in gross margin over the year. It rewards items that sell fast or carry big margins, and exposes items that do neither.
Dead stock: name it and move it
Dead stock is inventory that has not sold in a set period, often 6 to 12 months depending on your category. Run an aging report monthly. Then make a call on each item: bundle it, mark it down, move it to a clearance channel, return it to the vendor if your terms allow, or donate it. The cash you get back today is worth more than the full price you hope for someday.
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Reorder points and open-to-buy
Setting a reorder point
- 1
Find daily sales
Average units sold per day over a recent, representative period. Say 6 units.
- 2
Know your lead time
Days from placing the order to having stock on the shelf. Say 14 days.
- 3
Add safety stock
A cushion for slow shipments or a busy week. Say 30 units.
- 4
Calculate
6 x 14 + 30 = 114 units. When on-hand drops to 114, reorder.
Open-to-buy is a buying budget for a period. At cost: planned sales plus planned ending inventory plus planned markdowns, minus beginning inventory and anything already on order. If you plan $50,000 of sales at cost, want to end the month with $120,000, expect $3,000 of markdowns, start with $130,000, and have $25,000 on order, your open-to-buy is $18,000. Spend past that and you are borrowing from next season's cash.
Owner story
Priya's shop was profitable on paper, but she was always short of cash in January. An aging report showed about $22,000 of candles and seasonal decor more than a year old. She ran a bundle promotion, sent the rest to a regional clearance buyer, and adopted an open-to-buy plan for the holiday order. The next January, her bank balance was the highest it had been since opening. More on the pattern in Seasonal Cash Flow.
Illustrative composite, not a real customer.
Quick check
Your cost of goods sold is $360,000 and average inventory at cost is $120,000. How many days does stock sit, on average?
Words to know
- Inventory turnover
- Cost of goods sold divided by average inventory at cost.
- Dead stock
- Inventory that has not sold within a set period, such as 6 to 12 months.
- Reorder point
- The on-hand quantity that triggers a new order, based on sales rate, lead time, and safety stock.
- Open-to-buy
- The amount of inventory you can purchase in a period without overshooting your plan.
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