Are you looking to unlock the power of turn over and gross margin?

If you are, then you are like the majority of us small business owners. When you are buying and selling merchandise, turn over and gross margins are the way to effectively utilize and generate cash. While both numbers can be indicators of what has happened in your business, they are the method that brings cash into the business.

Turn over is a subject that I have written about in a number of other posts. For the purpose of talking about using an Open-to-Buy book, I will talk some about turn over again. I am sure that you know basically that “turn over” is an annual number that indicates how much money you have invested in inventory on average over the year compared to your sales. You figure this by dividing your sales for the year by the average inventory amount for the same year. This gives you a historical look at how well you used your money. Turn over figures vary greatly from industry to industry. To find out how you are doing compared to others in similar businesses find a “cost of doing business report” for your industry, it should have a section on what the average turn over is for similar businesses.

So, now you can figure your turn over for a year ago. But, what can be done to plan that turn over amount for this year and take actions to make that happen? That’s where an Open-to-Buy book comes into play. Check out a copy of an OTB book here.

Let’s say you want to have a turn over of 3 turns a year. In order to do that you will first have to decide what your sales goals are for that year. Once that is done you can start to plan out the inventory levels. You can do this for your entire business or break it down by merchandise groupings or departments. In our OTB example, we are using a department breakdown.

Looking at the example, our sales budget or sales goal was $13,300 for the year. We have a sales goal for each month. A simple way to plan inventory for each month for 3 turns a year is to divide 3 into 12 which gives you 4. This means that you need to have 4 months worth of inventory on hand at the end of any given month. To get that number you add the together the sales of the next 4 months. If your sales plan indicates that your next 4 months of sales are: $2,000, 1,800, 1,300 and 1,100, then your inventory needs are $6,200 at retail. In the example under April you will see that the “Planned End Of Month Stock” is $6,200. That is the total of May, June, July and August. To work up how much inventory you need to meet your sales and hit a turn over of 3 is as simple as adding up the next 4 months of sales after any given month. You can see this for each month on the OTB sheet on the Planned EOM Stock row.

Are you with me so far?

This method allows you to plan for months with more sales and those with less. You can take charge of your turn over goals by paying close attention to the amount of inventory

you have and how much you need to order to hit those goals. Having a little less inventory at any given time will increase your turn over, as long as you are hitting your sales goals. Having too little however may result in a loss of sales. Too much inventory means that you have your money tied up in stock and not available for other uses. More turn over means less inventory on hand at any given time and less money invested at any given time.

Ok, we’ve looked at turn over and using an OTB book for planning. In the next post we will look at gross margin and then how to combine them to enhance each other.

Till then, happy sales to you.

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