Here’s Why You Need to Pay Attention to Standard Inventory Measurements
Inventory management, done well or poorly, can have a huge impact on a company’s financial picture. Inventory usually represents a very large portion of a company’s assets. Continuous improvement in inventory management practices is very important. Here are four standard inventory measurements:
Inventory Turnover Rate
Net Sales / Average Value of Inventory
The result of this calculation will show you the number of times inventory is turned, or sold and replenished, in a given period of time. It is desirable for inventory to turn quickly so that the company can pay for the inventory purchased by using the money received for the sale of that inventory. Carrying inventory for long periods, forcing the company to pay for the merchandise before it is sold, is very expensive particularly in terms of interest charges.
Percent Inventory Carrying Costs
Inventory Carrying Costs / Net Sales (x 100 to express as percentage)
The result of this calculation allows you to track the percentage of net sales represented by the inventory carrying costs.
Gross Margin Return on Inventory Investment (GMROII)
GMROII = GM% x Sales / Average Value of Inventory
The result of this calculation (referred to as JIMROY) gives you the margin dollars returned for each dollar invested in inventory.
GMROII is a very important measurement because it indicates the profitable and problem items/categories and if applied to all vendor items, it will show you the most profitable vendors, lines.
(Actual Inventory – Book Value of Inventory) / Net Sales (x 100 to express as percentage)
The result of this calculation gives you the percentage of your net sales being lost to shrinkage, which is loss due to theft or paperwork/process errors. Most organizations have established a shrinkage target and if the result of this calculation is higher than the target, serious investigation is warranted.
Always remember…If you can’t measure, you can’t manage.
Because inventory is often a substantial asset on the Balance Sheet, it deserves a lot of attention. Most companies watch their inventory and related costs very closely and continuously look for ways to improve.
If you could use some help when it comes to watching your numbers, organizing and reporting contact us today.