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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.

5 best retail math articles from Summer 2012

Over the past few months there have been several good articles written concerning both retailing and retail math analysis.  What follows are 5 of my favorites.  Enjoy.

  • Basics of managing Retail Business Performance”  by applythinking.  This post provides an insightful analysis of how retailers must use both turn and gmroi to analyze their overall performance.
  • How Much Does Your Beer Really Cost?” by Scott Metzger.  This cost analysis article was originally posted in The New Brewer back in February, but I didn’t see it until it hit C-Store News in June – so I’m counting it as a summer article.  The cost analysis is thoughtful, and provides helpful explanations of the various methods as well as recommendations on how best to use the information (even if you sell something other than beer.)
  • 6 Tips to Drive Inventory Turnover” by Ted Hurlbut at the “All Things Retail” blog.  While this isn’t exactly an article on mathematical analysis, it is an excellent explanation of how a retailer can improve their inventory turnover.  You will also find a short Youtube video giving highlights from the article.
  • The Mathematics of Bookselling” parts one and two by Dave Sheets at Lessons from the Saddle.  Dave takes the reader through a thoughtful analysis of gross margin percentage and inventory turnover in the bookselling industry.  His examples are clear and easy to follow, and could be applied to any retail sector.  He also has a 5 minute video covering some of the same material.
  • Sales, Stock, and Inventory, Oh My! How to Use POS Data to Improve Retail Operations” by Scott Kreisberg at The Point of Sale News.  This article is a helpful explanation of the 5 key retail math measurements that should be used when assessing the performance of your inventory.

There you have it.  The top 5 articles of the summer – in my humble opinion.  Please leave a comment if you feel there are others that should have been added to the list.

photo credit: <a href=”http://www.flickr.com/photos/simax/3390895249/”>Michael | Ruiz</a> via <a href=”http://photopin.com”>photo pin</a> <a href=”http://creativecommons.org/licenses/by/2.0/”>cc</a>