As we discussed in our recent post on inventory turn, we talked about the importance of inventory planning and how calculating your inventory turn can allow you to create a strategy for buying. Today we’re going to take one more step further into your reports and begin to see how we can use them to ensure our inventory on hand aligns with what’s selling in our store.
Over the next two weeks, we will be talking about two levels of this evaluation. We get it… getting into reporting is pretty intimidating. It’s safe to assume you didn’t get into retail because you’re a math whiz but because of your passion for your products and customers. To help with that, we’re breaking it down into a simple strategy and then an advanced one to come back to later. The first is a great step forward for anyone looking to gain a better understanding of their inventory on hand. The second is a more advanced and holistic way of evaluating your inventory, buying and sales goals that we will talk about in weeks to come.
A Great Step Forward
As we alluded to when discussing inventory turn, taking the first step into utilizing reports to help make decisions is a huge step forward for any business. With this in mind, let’s talk about how you can use two reports available on almost any retail platform to get a good grasp on the status of your inventory.
Inventory Assets Report – This report can be called many things, it is simply a report of all items in your inventory, with the price and category included. This allows you to see at a categorical level the value of inventory in each category.
Sales By Category – This report is a report of all sales grouped by the product categories that the sold items belonged to. Therefore allowing you to see at a categorical level what categories are selling best.
In reading this you may notice the repetition present in those report descriptions, this is intentional because looking at inventory assets and sales at a categorical level allow us to calculate one great retail metric Months of Supply.
Months of supply is best defined as the number of months that your current inventory on hand would last based on your average sales per month. We’ll talk more about the application of it in a moment, but first, how is it calculated.
Months of Supply = (Inventory Value of Category / Average sales per month of category)
Let’s look at an example: Hats for Cats is a great fictional store in rural Rhode Island who currently has $30,000 worth of hats in their inventory. Additionally, the past few months they’ve sold on average $5,000. Using our formula, the calculation would be ($30,000/5,000) bringing our months of supply to 6.
Now that we know our months of supply is 6 let’s talk about why we need to look at months of supply. You see, with 6 months of supply on hand we’re saying that Hats for Cats anticipates at most an inventory turns in a year of 2. However, in talking with the owner we know that their desired inventory turn is 4 per year, or one every three months. With the goal of 4 turns per year, the most Hats for Cats should have in their Hat’s category is $15,000, letting us know that they are $15,000 over in inventory. This was calculated using the following formula (Average monthly Sales/(12/desired turns a year)).
So there you have it, that’s how we can use two basic reports from your point of sale, and a little bit of math to gain a deeper understanding of your inventory as well as your business. As always, we’re here to help so if there are any questions you have about any our posts, reach out and we’d be happy to talk.
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Streamline Retail is a consultancy based in Houston, Texas. We help retailers across the country with retail operations, inventory planning, and eCommerce strategy (+ design!).