Profitability And Stock Turn Rate
The inventory of the typical store represents the largest single element of its total assets. The sale of goods from this inventory is the merchant's chief source of operating profit. Thus, the way in which this merchandise investment is put to work is of utmost importance in achieving a profitable operation.
To illustrate, a retailer may carry an average retail inventory of $200,000, with sales of $400,000, resulting in a 2.0 Stock Turn Rate. If this retailer had the same $400,000 sales but a 3.0 Stock Turn Rate, the average retail inventory would be $133,300. This is a difference of $66,700 at retail or approximately $32,000 at cost.
The cost of owning excess inventory is approximately 2½% per month, or 30% per year. This is due to increased expenses such as interest, insurance, buying expense, receiving department expense, property taxes, markdowns and shrinkage. Therefore, a retailer can reduce these expenses by reducing his average inventory level. In the example above, the annual savings would be approximately $10,000 ($32,000 times 30%).
All other things being equal, a higher stock turn rate tends to lead to higher sales and a higher profit, which should be an essential goal of every merchant. I will discuss this more later, but first we must have a good understanding of what Stock Turn Rate is and how it is to be computed.
WHAT IS STOCK TURN RATE?
Stock Turn Rate can be computed using units, cost dollars or retail dollars. For comparative purposes, it is desirable that the Stock Turn Rate calculation be standard. We advocate retail, which is the generally accepted method in the retail industry.
Stock Turn Rate is the ratio of sales to average inventory. It is computed as follows: Stock Turn Rate = Total Annual Sales divided by Average Inventory at Retail
Example A
Annual Sales = $900,000: Average Retail Inventory = $450,000:
Stock Turn Rate = 2.0
Example B
Annual Sales = $900,000: Average Retail Inventory = $300,000:
Stock Turn Rate = 3.0
COMPUTING AVERAGE INVENTORY
The chief problem in computing Stock Turn Rate is to determine the average stock carried during the period. This can be a problem since there are so many variations in use. The chief methods are:
1. Average of the inventory at the beginning and end of year.
2. Average of inventory at the beginning, middle and end of year.
3. Average of monthly inventory levels.
The standard is to use the average of the monthly inventory levels which is computed as follows:
Inventory at the beginning of the year plus the inventory at the end of each month, divided by thirteen.
WHAT STOCK TURN RATE IS NOT
While Stock Turn Rate is the ratio of sales to average stock, it is not the actual number of times a physical stock of goods is bought and sold during a period. A simplified example follows:
A retailer purchases a 4-month supply of socks, a staple item, and does not restock until the old stock is completely sold out. During the year, three purchases, each $4,0000 are made and three lots are sold, for a total of $12,000 but the Stock Turn Rate is not three. The average stock is about a 2-month supply, since four month's supply is on hand only at the start of each 4-month period and virtually none is on hand at the end of each 4-month period. THus the average stock is about half the amount received each 4-month period, or $2,000. This results in a Stock Turn Rate of approximately six, and a lot of lost sales due to having such a low supply on hand during much of the year.
WHAT IS THE IMPORTANCE OF STOCK TURN RATE?
The Stock Turn Rate ratio measures the effectiveness of inventory planning control. A Stock Turn Rate that is too low indicates poor planning and lack of control. A classification having a very low Stock Turn Rate usually will not be achieving its sales potential due to having too much old merchandise in stock and too little new, fresh merchandise. It is also likely to have higher than normal markdowns, thereby reducing Gross Profit. Stock Turn Rate can also be used to calculate the proper beginning-of-month inventory level for each classification on the Open-To-Buy.
ADVANTAGES OF A FAST STOCK TURN RATE
In retailing it is important to realize a large volume of sales on as small an inventory investment as possible while maintaining sufficient inventory to meet customer demands. Also, it is important, as fashions and seasons change, to turn the inventory quickly so as to avoid excessive markdowns or carryover of out-of-season inventory. Another advantage is that a fast Stock Turn Rate will actually increase sales due to the increased flow of fresh new merchandise.
LIMITATIONS OF A FAST STOCK TURN RATE
While a fast Stock Turn Rate has many advantages, the Stock Turn Rate can be too fast for a particular classification. When that happens the store risks losing sales due to inadequate assortments.
WHAT CAN BE DONE TO IMPROVE STOCK TURN RATE?
From a study of the basic Stock Turn Rate formula, it is clear that there are three ways to increase Stock Turn Rate:
1. Increase sales without increasing the average stock assortment.
2. Decrease stocks without interfering with sales.
3. Increase sales and at the same time reduce stocks.
The approach used depends on the circumstances. Probably the surest way to increase Stock Turn Rate over a period of time, is to increase sales volume without a proportionate increase in inventory levels. However, since a retailer has greater control over his inventory than over his sales, this should be where attention should be given first. THe first step to increasing Stock Turn Rate and sales, incidentally, is the preparation of an Open-To-Buy. This should be based upon planned sales, planned markdowns and planned Stock Turn Rate. Once the Open-To-Buy has been prepared, the retailer can turn his attention to taking the necessary steps to reduce the actual inventory on hand to bring it in line with the planned inventory on the Open-To-Buy. A few suggestions on how to do this follow:
1. Buy more frequently, in smaller quantities.
2. Reduce number of assortments (vendors, styles, colors, sizes, prices).
3. Eliminate slow-selling merchandise.
4. Buy closer to the selling season.
SUMMARY
Stock Turn Rate is an important ratio used to measure the effectiveness of merchandise planning and control. Its two most important uses are in Open-To-Buy planning and then in measuring performance against this plan. Most retailers I see that are having problems achieving adequate profits have a poor Stock Turn Rate due to lack of planning, which results in overbuying, excessive markdowns and a low Gross Margin.
This article was written by Linda Carter, President of The Retail Management Advisors, a retail consulting firm whose mission is to help independent retailers survive and thrive. Linda can be reached at 1-877-206-1299 or l.carter@the-retail-advisor.com. Our web site is http://www.the-retail-advisor.com
You can reprint this article as long as the above information is included.
 Google News Updated : Sat, 11 Oct 2008 23:50:53 GMT Got $700 Billion? Sweat the Details - New York Times
New York Times - The bailout plan gives Henry M. Paulson Jr., the Treasury secretary, three broad choices in buying assets. By ALAN S. BLINDER THE House of Representatives was against the bailout bill before it was for it. US firms up plan to buy into banks to stem crisis Paulson Indicates Need to Purchase Bank Equity `Soon as We Can' Publ.Date : Sat, 11 Oct 2008 20:39:07 GMT US space tourist set for blast-off - Reuters
Reuters - By Maria Golovnina BAIKONUR, Kazakhstan (Reuters) - US video game magnate Richard Garriott will blast off into space aboard a Russian spaceship on Sunday watched by his father, a NASA astronaut who went into space at the height of the Cold War. US space tourist set for launch Russian space chief reassures US partners Publ.Date : Sat, 11 Oct 2008 23:10:50 GMT World is united to tackle financial crisis, IMF says - MarketWatch
MarketWatch - By Rex Nutting WASHINGTON (MarketWatch) -- Financial policymakers from 180 nations around the world are united in their resolve to tackle the financial crisis, Youssef Boutros-Ghali, head of the International Monetary Fund's policy committee, ... G7 nations face going cap in hand to China Finance officials comments at IMF meetings Publ.Date : Sat, 11 Oct 2008 21:23:46 GMT Nobel Peace Prize winner wants jobs for the young - International Herald Tribune
International Herald Tribune - AP HELSINKI, Finland: Nobel Peace Prize winner Martti Ahtisaari said Saturday that finding jobs for more than 1 billion young people in the Middle East and Asia will be a major challenge to peacebuilding in the next decade. Video: Ex-Finland President Wins Nobel Peace Prize Nobel Finn Publ.Date : Sat, 11 Oct 2008 13:12:07 GMT Gay Marriage Is Ruled Legal in Connecticut - New York Times
New York Times - In Hartford, Crystal Pretzman of Willimantic, Conn., celebrated the State Supreme Court's decision to legalize same-sex marriage. Video: Connecticut Court Allows Gay Marriage Marriage ruling not the end of debate in Conn. Publ.Date : Sat, 11 Oct 2008 18:13:08 GMT GOP Officials Hope for Stability From McCain - New York Times
New York Times - By ADAM NAGOURNEY and ELISABETH BUMILLER Republican leaders across the country said Saturday that they were worried that Senator John McCain was heading for defeat unless he brought stability to his presidential candidacy and settled on a clear message ... Antiwar Protestor Disrupts McCain Iowa Rally Obama needs 75 percent turnout in Philadelphia, says Rendell Publ.Date : Sat, 11 Oct 2008 22:23:47 GMT YouTube to play full TV episodes with ads - Afterdawn.com
Afterdawn.com - Google has announced that it will begin offering full-length TV episodes through its YouTube platform beginning this week, thanks to a content deal with CBS. YouTube to Offer TV Shows With Ads Strewn Through YouTube beams up Star Trek for long-form video, prominent new ads Publ.Date : Sat, 11 Oct 2008 21:13:12 GMT Increase Website Traffic |
PARLOT::Ebooks, Scripts,
Websites, and more... Almost without exception, people don't start planning for their retirement... Read More For investors only... and for speculators who need to invest... Read More When trying to analyze whether a promotional ad for an... Read More As a precious metals investor, you may heard much about... Read More It is important to answer the following questions before you... Read More 1. Lacking an investment plan a/k/a/ "Don't take a trip... Read More Over 80% of all individual investors lose money in any... Read More If you own a company that sells complicated products and... Read More The forex market is what is called an international exchange... Read More Shorts. Let's see. If there are shorts there must be... Read More How many of you out there think that the market... Read More "Risk comes from not knowing what you're doing!" Warren Buffett... Read More 1. How to Treat Gap Openings A gap up or... Read More The inventory of the typical store represents the largest single... Read More Has your broker ever told you that a stock is... Read More In April, the U.S. Mint revealed plans to strike in... Read More The world of trading can get very complex because the... Read More There is an area in Brazil that has lower crime... Read More Let me start by answering that question...if an annuity fits... Read More In recent months, many advisors have talked a lot about... Read More There are a number of key reasons why individuals and... Read More A fickle stock market encourages good-humored mockery.Recently, as I watched... Read More You all know what CYA stands for. Of course, Cover... Read More First, I need to explain about e-currencies or digital currencies.... Read More Denial is a ubiquitous psychological defense mechanism. It involves the... Read More
Adsense
websites
Planning for Retirement
Asset Allocation Lessons: The 70% Inflation Solution
How to Analyze the Veracity of Investment Newsletters
Numismatics are for Collectors, Not Investors
Before You Invest You Must Read This
Top Ten Investment Mistakes
Seecrets on Investment: Tired of Making Huge Losses in the Stock Market ? Part 1
Expand Your Pool of Investors for Your Company
Forex market offers opportunity and information
Short Selling for Investors
Options Made Easy and Investor Education - Simple Enough for a 10 yr Old Kid
Well Managed Investing Risks Bring Rewards!
5 Day Trading Tips for Success
Profitability And Stock Turn Rate
Overbought/Oversold
New U.S. Mint Coins a Golden Opportunity
Success Trading: Some Basic Terminology for New Traders
Property Investment Just Got Exciting
Should You Put Your Annuity in an IRA?
How to Invest Overseas - Intelligently!
Going Offshore For Asset Protection
Sitcom Investing
CYA
DXPortfolio: A Great Passive Investment of 25% to $40% per month
Bankers in Denial
Affordable and Reliable Web Hosting Starting at $4.49/Month
Approaches to Investing
Here is a small summary of the three major approaches... Read More
Invest or be Pink Slipped
Firing an employee seems to be easier and easier for... Read More
Evaluating A Money Manager
Scams and frauds are designed to take your money through... Read More
Choosing A Financial Advisor
With so many financial advisors trying to woo you with... Read More
Discipline in Trading and Investing
The one thing I can think of that most affects... Read More
The Biggest Oil Opportunity in the World ? And How You Can Profit From It
Where is the second biggest deposit of oil reserves in... Read More
Six Principles of Successful Investing
1. Begin investing immediatelyProcrastination is the number one enemy of... Read More
Asset Location ? Increase Investing Returns & Reduce Your Taxes
Location ? Once the holy grail only for real estate... Read More
Planning for Retirement
Almost without exception, people don't start planning for their retirement... Read More
Caveat Emptor: You May Owe Taxes Despite 401(K) Losses!
One among many ways you lose money in non-indexed mutual... Read More
Fundamentals of Option Pricing
When one begins to consider an option, it is very... Read More
Larry, Moe and Curley, Investment Brokers
Larry, Moe and Curley were sitting in their favorite restaurant... Read More
Bad News - Why The Financial News Media Can Cost You Money!
The communication innovations we have around us today like the... Read More
Seecrets on Investment: Tired of Making Huge Losses in the Stock Market ? Part 1
Over 80% of all individual investors lose money in any... Read More
The 8 Biggest Mistakes When Designing Portfolios - and How To Avoid Them
Are you as good an investor as you think? Do... Read More
Why You Need To Buy and Sell Gold Coins (Part 5)
Grading coinsThe condition of a coin is commonly summarized by... Read More
The Arrow-Debreu Contingent Claims Model of Investment
Throughout the discussion of speculation and stability, we emphasized that... Read More
Why Should I Use Penny Shares to Build Wealth?
A strategic question. Why indeed?1. A penny share would usually... Read More
Day Trading the SP Futures with Initial S/R and the NYSE TICK
For instance, if the market moves up in the first... Read More
Poll Names Coin Laundries Best Investment For 2005
According to Morton Pollack, CEO of PWS, The Laundry Company... Read More
Five Sure Fire Way to Secure Your Financial Future
"You can be poor when you're young, but you can't... Read More
Investing Online Has Its Rewards: Find Out How To Take Advantage Of Them
Computerized investing. Online investing. Have you taken the next step... Read More
Annuity Investment - The Whole Truth
Do you ever feel like you haven't been told the... Read More
Stocks: Reduce Risk Yet Maximize Profits
It is important to note that every smart investor wants... Read More
How to Invest Your Money
Think carefully on how to invest your money because if... Read More
Investing |