RUNNING THE BUSINESS
It’s Your Turn
Taking time to calculate gross turn can help you evaluate the performance of your inventory investment.
BY MEL SELWAY
Carlos - stock.adobe.com
The subject of this article relates to phrases from a song by The Byrds: “To everything there is a season … turn, turn, turn.” To a retailer in the RV industry, seasonality and turns of inventory are very important.
Seasonality is important because the products that you sell and service may experience the majority of their use in different seasons of the year.
Turns are important because:
- You want your prospects and customers to turn their steering wheels to direct their vehicles into your parking lot.
- You want to assist your customers in keeping the wheels of their vehicles turning by having the right parts and accessories when they need and want them.
- You want to ensure that you keep your inventory exposure minimized so that you always have money to invest in the products that are in demand by your customers.
Gross Turns — Defined
Many business owners have heard of gross turns. But what is the actual definition? Basically, it is the number of times that you sell the average value of your inventory investment in a specified period, usually one year.
The formula for calculating gross turns is:
It is worth noting that both the numerator and the denominator are stated at cost. The value for the numerator of the equation is determined by adding up the cost of sales for an entire year. This is important because of the seasonal nature of your business. The denominator of the equation is calculated by adding the month-end inventory cost value over the same year and dividing by 12 to obtain the yearly average inventory cost.
From the data in Figure 1, if we divide the cost of sale for the year ($6,267.26) by the average inventory cost for the year, we learn that this inventory of goods has achieved a gross turn of 2.73. This is below the level of accepted gross turn performance, which should be in the range of 4-7. To improve the gross turn for this inventory, it will be necessary to increase the amount of goods sold, reduce the amount of goods in stock or some of both.
However, there are some other factors related to the gross turn of your inventory that should be considered before initiating a plan of action to improve the gross turns calculated from the data in Figure 1.
Other Factors To Consider
Subdivisions of Inventory: Does the data in Figure 1 represent the entire inventory of goods in your store? If it does, then the first factor you should consider is to track your gross turn for the individual subdivisions of your inventory. These subdivisions could be named Categories, Sources, Groups, Vendors or other such titles.
If you track the gross turn for each subdivision of your inventory, then you could determine which portions of your inventory investment are achieving the gross turn goal that you have established — and which aren’t!
For example: If you have six subdivisions of inventory, they might range from 1.70 to 12.00 gross turns (1.70, 2.73, 3.00, 4.49, 5.23, 12.00). Overall, the inventory might be turning 4.86, which is within the desired gross turn range of 4-7. However, when you look at the gross turn for each of the subdivisions, it is obvious that three require substantial improvement. Had you merely viewed the overall gross turn, you might not have thought you had a severe problem.
Slow Moving Inventory
Are there items in any of your inventory subdivisions that haven’t sold in more than nine months? These items would fall into the category of slow moving inventory (SMI). In a seasonal business, any item that has not experienced any demand in 10 or more consecutive months could be considered SMI. Items that have not achieved a demand in one year or more are definitely SMI. How does SMI impact your gross turn?
The formula for gross turn requires that we divide the cost of sales (in a 12-month period) by the average inventory cost for that same year. By our definition in the previous paragraph, items with no demand in 12-plus months are SMI. Therefore, these items have not contributed to the numerator of the gross turns formula (cost of sales). However, their cost value is included in the calculation of the denominator (average inventory cost). Suppose we subtracted the value of the SMI for each subdivision from the inventory value of the subdivision. How would that impact the gross turn for each subdivision?
In Figure 2, there are three sets of data for the subdivision titled Service Parts. The first set of data shows the gross turn for the entire group of Service Parts, which calculates to 4.49, which is in the acceptable range of 4-7.
The second set of data shows the values for the SMI portion of the Service Parts subdivision, which calculates a gross turn of 0.00 because no sales have occurred.
However, in the third set of data, the value of the SMI has been subtracted from the ending inventory value of the subdivision with the resulting gross turn calculating at 5.23. An increase of almost ¾ of a turn has been achieved by viewing the working inventory separately!
You should not ignore the SMI that exists in your inventories. It is worth subtracting it from your working inventory so that you can evaluate the purchasing and selling efforts of the parts department staff. And now that you have identified the amount of impact it has on your inventory investment, you can develop methods of eliminating it from your inventory.
What Can You Do?
If the data displayed in the two figures appears to have come from a spreadsheet, it has. If you are interested in tracking and evaluating the gross turn of your inventory subdivisions, develop a spreadsheet document. Each month, enter the cost of sales and the ending inventory value for each subdivision into the appropriate cells of the spreadsheet. If you want to track the impact that SMI has on your gross turn, it will be necessary to create two additional rows of data for each subdivision: SMI Value and Inventory Cost minus SMI.
For the gross turn calculations, it will be necessary to create formula cells. One formula cell to total the cost of sales for each subdivision. Another formula cell will be required to total the ending inventory value for each subdivision and divide by 12 to obtain the average inventory value. Another will be required to divide the cost of sales total by the average inventory value to calculate the gross turn.
It is very important that you gather the data to be entered into the spreadsheet tool after the close of business on the last business day of each month and before the start of business on the first business day of the subsequent month. The data will not report the actual gross turns until you have completed one year of data collecting. So, the sooner you start, the sooner you will be able to determine how your inventory investment is turning.
I have taken this opportunity to present a very important tool that could be used to evaluate the performance of your inventory investment. Now it’s your turn!
Mel Selway is the president of P.A.R.T.S. Inc., a Sahuarita, Arizona-based firm providing business management analysis and training to retailers. He can be reached at 520-336-8606 or melselway@aol.com.
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