Category Archives: Beginner’s Guides

Inventory Turnover: Retail, Cost, or Unit?

Periodically I have students who are confused by the idea that there is not one, but three different ways to calculate inventory turnover.  What really confuses them is that when using all three formulas to calculate inventory turnover (turn) for a retailer, each formula provides a different answer.  And, that this happens even though each formula has the same two basic components:  Sales and Average Inventory.

Let’s start with the formulas:
Retail Turnover = Annual Retail Sales/Average Retail Inventory
Cost Turnover = Cost of Goods Sold/ Average Cost Inventory
Unit Turnover = Unit Sales/ Average Unit Inventory

Example:

Retailer Z’s Financials Show:

Total Retail Sales $2,000,000
Cost of Goods Sold $1,200,000
Unit Sales 180,000
Avg. Inventory at Retail $400,000
Avg. Inventory at Cost $220,000
Avg. Inventory in Units 30,000

Let’s Calculate!
Retail Turnover = Average Retail Sales/Average Retail Inventory
= $2,000,000/$400,000  = 5.0

Cost Turnover = Cost of Goods Sold/ Average Cost Inventory
= $1,200,000/$220,000 = 5.5

Unit Turnover = Unit Sales / Average Unit Inventory
= 90,000/ 15,000 = 6.0

While the inputs are similar, they are not identical, due to each one utilizing a different method of measurement.  Typically Retail Turnover will provide you with the most conservative estimate of your turn rate out of the three calculations.  This is due to the fact that the Retail Sales and Average Retail Inventory numbers both have initial margin (or markups) built into them.

Next time we’ll look at interpreting and using these numbers.

Gross Profit vs. Gross Margin vs. Gross Profit Margin

meadow-680607_640Some time ago Mame asked me the difference between gross profit and gross margin. As this is a question that crops up regularly in my classes, I thought it might be a good idea to tackle it here.

The truth is, there really isn’t a difference. Some retailers prefer to say gross margin, other retailers prefer to say gross profit. (Although some will use the term gross margin when referring to gross profit as a percentage of net sales.) Both terms refer to the difference between net sales and total cost of goods sold.

Much like the term gross margin, a few use gross profit margin to refer to gross profit dollars as a percentage of sales.

A beginner’s guide to sell-thru (sell-through)

Sell-thru is one measurement that seems to cause a lot of confusion.  And, it is probably the one I get the most questions about.  Much like GMROII, I can’t give comprehensive coverage to it in a blog post, but I can give you a start to understanding it.

Is it sell-thru or sell-through?  And what exactly is it?

Either sell-thru or sell-through is correct.  Sell-thru is the percent of a product’s (or category’s or department’s) inventory that sells during a particular period of time.

How do I calculate it?

Formula:  Units Sold/ (Units on Hand + Units Sold)  or  Units Sold/Total Units Received

Example:  A store received 100 units of a promotional cereal in a special display unit on the 1st of the month.  Because the product is a one-time buy, they would like to be sold out by the end of the month.  The buyer believes the product should sell evenly throughout the month.   Two weeks into the promotion 30 units have been sold.

Calculation:  30/100 = 30% sell-thru

To achieve the buyer’s goal, the store needed to sell half of their inventory by this date.  They are behind and need to find a way to increase their sales rate.

NOTE:  I have greatly simplified the example given here.  In the real world, there are always complications.

What do I use it for?

Buyers often use sell thru to determine whether a product that is purchased with a finite amount of inventory will be sold by a pre-determined date.  Sell-thru can also be used to monitor inventory levels for regular products by using beginning of month inventory instead of total units received.

If you have questions concerning sell-thru, or would like to see a similar beginner’s guide for a different measurement, please let me know via a comment or an email.

Note:  Other retail math formulas may be found on the Three Buckets CheatsheetBeginner’s Guides on other retail math topics are also available.

A beginner’s guide to GMROI (GMROII)

If you’re just starting out in retail, you probably have a lot of questions about all of the various retail formulas.  However, many folks seem to find GMROII the most bewildering.  So, here is the beginner’s guide to GMROII – everything you need to get you started with this measurement.

Is it GMROII, GMROI or Jim-Roy?  And, what does it mean?

The answer to the first question is all of the above.  It can be abbreviated GMROII or GMROI, and is pronounced “Jim-Roy.”  GMROII stands for gross margin return on inventory investment.

GMROII is defined as the amount of dollar gross profit a retailer receives in return for every dollar they invest in inventory.

How do I calculate it?

Formula:              Annual Dollar Gross Profit/Average Dollar Cost Inventory

Example:
Annual Dollar Gross Profit = $2,000,000
Average Dollar Retail Inventory = $500,000
Maintain Margin = 35%

Solution:
2,000,000/(500,000*(1-.35))
GMROI = 6.15

**Note:  Often cost dollar inventory figures are not available.  They can be estimated using the maintain margin cost compliment (1-MM).

What do I use it for?

GMROII can be calculated for an individual product, a department, or an entire retail chain.  It is a measure of how efficiently a retailer is using their inventory to produce gross profit dollars.  At a minimum, a retailer’s GMROII must be above 1.0.  (Otherwise they are earning less money than they invested.)

If you have questions concerning GMROII, or would like to see a similar beginner’s guide for a different measurement, please let me know via a comment or an email.

Note:  Other retail math formulas may be found on the Three Buckets Cheatsheet.  Beginner’s Guides on other retail math topics are also available in the Beginner’s Guides Category.