Convert Inventory to Dollars
Last month, we discussed your balance sheet, your current assets and the benefits of having cash available to take advantage of opportunities that arise.
If your accounts receivables and cash management are currently in good shape, what else can you tap to raise cash?
How about your inventory? Last month, when we discussed where three of the larger electronics retailers had their current assets, Best Buy had the lowest inventory as a percentage of current assets (42 percent), followed by Circuit City (60 percent) and Tweeter (75 percent).
These numbers don’t tell the whole story; other metrics are used to judge how good inventory management is, many of which measure how many times you turn your inventory per year. For the past few years, the most successful electronics retailers clearly have worked at improving their turns.
Many retailers use consignment inventory and don’t strip out those sales from their revenue numbers, which makes measuring inventory numbers more difficult. Additionally, service and installation fees should be removed from revenue numbers when looking at inventory turns. With this noted, using the financial reports from the public companies we mentioned, the inventory turns for Best Buy and Circuit City are close to six times a year, while Tweeter shows significantly lower turns, at slightly over four times.
Most of you, I would surmise, are closer to Tweeter’s turn number than Best Buy’s. However, the old adage that “higher-end stores have more displays and turn inventory less as a result” doesn’t hold water with me; if they’re truly high-end, do they need to offer the selection they do? If customers primarily are looking for advice from these high-end dealers, they don’t need the huge selection.
Why is inventory turnover more important than ever? Our products aren’t antiques; they don’t get more valuable over time. With decreasing prices—rapidly decreasing prices, in the case of flat panel—the profitability of each sale cannot be maximized if you are carrying too much inventory.