Of all challenges a retailer faces, the challenge of purchasing the right amount of product has to be among the top three. Buy too much and your cash flow tanks; buy too little and you’re losing out on sales and revenue. How much do you need? Enough for your customers to buy but no more. HA! If only it were that simple. It’s all about inventory turn, but what does that even mean?
Truthfully, for both new and existing retailers, inventory planning is daunting but planning successfully is one of the biggest deciders of your success in retail. It’s the difference between paying yourself and going out of business.
A tale of two stores
There’s this store, Miss Guided Boutique, and the owners are passionate about their products and their customers and you can see if when you visit their store. From the cute dresses to the friendly staff, they are invested in every way. This month, they are hoping to do around $85,000 in sales. We asked them how much inventory they needed and they really didn’t have a clue. They just bought what felt right.
They didn’t know.
There’s another store, On Point Boutique, and these owners are equally passionate. They love their products, customers, and have fun doing it. They specialize in cute tops but have everything that you’d expect out of a local boutique. This month, they are also hoping to do $85000 in sales. We asked them how much inventory they needed and confidently gave us an answer.
Where did that number come from?
How to track inventory – Undestanding Inventory Turn
Generally, if you asked a retailer how to communicate their inventory assets, you’d get the same answers. Some would give you their asset values in retail, others would say it in terms of cost. Both are correct. But both are missing something.
I think the best way to track inventory is time. Yes, time. Like minutes, hours, days, weeks, months, and years.
How much time would all the inventory on your sales floor (and backroom) last if you didn’t buy another thing? If you have $10 in inventory and expect to sell $1 per day, you have ten days worth of inventory. When planning out your inventory, it’s best to view your plans in regards to your predicted sales and the inventory needed to support those sales goals during a set period of time.
This is where Inventory Turn comes in. Generally, how many times in a year do you want your store to completely refresh? How many times should items be sold and then replaced? I know this happens every day so it’s not a literal refresh one night but imagine having a rack that can fit a set amount of shirts, how many times do you reasonably expect to change out what is on that rack? For many, particularly in clothing, it’s best to at least start with the seasons. You want at least four inventory turns in a year (this number will change for each and every business).
So back to time.
If we want four inventory turns in a year, we now know that our store should never have more than three months worth of inventory on our sales floor at any given time. If you have more than this, you are losing cash flow and likely not improving sales; less than this and you are likely losing out on sales from not having the right products in your store.
You’re retailers, not math gurus, what can you do?
I have to be honest, we purposely try to avoid sales pitches on our blogs. We’re big believers in giving a lot of value up front and maybe down the road finding ways to work together. Especially with content, it’s the way to do business. Nobody likes companies that just sell, sell, sell. We certainly don’t.
But, if inventory planning is something you know is important and you aren’t sure how to get started, we can help. We use one of the best inventory planning tools available and we’ll give you a clear strategy for what to buy, how much, and when. You’ll have a clear budget going into market of what is needed for your business to thrive. Interested, fill out the form on our contact page and we’ll be in touch.
But, I know many of you won’t be able to work with us and that’s ok.
A great place to start is to look at your sales goals for the year and back into numbers from there. The best thing you can look at is your historical sales numbers and where you reasonably believe you are headed in the coming year.
If you want to sell $120 this next year and can say with certainty that you’ll sell around $10 per month then we need to figure out how much inventory to have. If you think you’ll be able to turn over your store four times, then you’ll need $30 of inventory at the start of each month. This means that at the end of each month, you should be bringing in an additional $10 in inventory to replace the $10 that sold.
Is it that simple? Yes and no. It’s obviously more complicated than that but it’s a place to start. There’s more to consider like inventory freshness, markdowns, donations, employee discounts, and so on. We hope to explain more of this in future posts but, for now, I hope this helps clear up inventory turn.
So back to our boutiques.
Miss Guided Boutique learned from On Point and created an inventory plan. Was it perfect? No, but it was a start.
Sales goal this month: $85,000
(Sales goals for next two months remain at $85000/mo)
Number of turns per year: 4
85,000 x 4 = $340,000 (Total amount of inventory needed, going into this month)
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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!).