One of the trickiest parts of running a custom business is managing inventory.
Prices drop quickly as new technologies become more mainstream. If you buy too much inventory, you could be stuck with products that might have cost you just about what they’re worth to your customers today. On the other hand, if you run low on merchandise that may be tightly allocated by your suppliers, it can be just as costly.
Given this ambiguity, what’s a C-business to do? Well, allow me to drop off your keys to inventory control. You must:
Measure the performance of your inventory. Inventory turnover (turns) and Gross Margin Return on Inventory (GMROI) do just that. Consider tracking both by brand and by product category. Doing this will enable you to determine if you’re over-inventoried in a certain category, or if you need to analyze your relationship with a particular vendor.
Compute turns by dividing your annual cost of goods sold by your average inventory. The industry average is 3.93, but if you can bring turns to five or even six times per year, you’ll yield much greater return. For example, if your average annual cost of goods sold is $1 million, you want to stock no more than $200,000 in merchandise (five turns). Remember, your on-hand inventory includes your displays, back stock and any merchandise you’ve purchased for specific projects but haven’t yet installed and invoiced.
GMROI, meanwhile, tracks the relationship between turns and gross margin. To compute it, divide your gross margin dollars by your average annual inventory.
Logic dictates that if things sell through very quickly, you might be able to sell those products for a bit lower margin than those that move more slowly. As inventory ages, your costs of warehousing and interest rise; you must sell those products for a higher margin.