Turns, Turns, Turns
Strapped for cash? If you cut down on inventory and improve your turnover, you might just free up a good amount.
By Robert Ain
With all due respect to Pete Seeger and The Byrds, every season is an important time to look at turns—inventory turnover, to be specific.
Inventory turns are a subject that everyone talks about and very few actually manage in a disciplined, organized process. At the end of the day, improving inventory turns is the best way to improve cash flow and free up dollars for spending on other revenue-producing parts of your business.
For example, let's say that you are nine to 12 weeks out in scheduling installations. You should be thinking, "If only I had the cash to lease or buy another truck, tools and labor to shorten that backload of work, I'd be in better shape." If you improve your turnover, you can free up cash to allow for these additional expenses and create more sales. Those new sales, with no other increases in expenses, will therefore increase revenue and profits.
What is inventory turnover? Turns are measured by taking the value of the products sold at cost and dividing that number by your average inventory.
Let's use a fictional custom retailer's numbers as an example.
Suppose the business has annual sales revenue of $1.2 million. The labor portion of these sales is 25 percent, which agrees with the average from CEDIA surveys of custom installers. If we deduct this 25 percent ($300,000) from the revenue side, the business sold $900,000 of product during the year. If the gross profit margin on the products sold was 33.33 percent, the value at cost of the product sold was $600,000.
Now, if the average inventory during the previous 12 months was $150,000, our fictional C-tailer turned its inventory four times. If the average inventory was $200,000, the turnover was three times.