More Sales. More Profit. More Life!
Why Stock Turn can make or break a Retail Business!
What is Stock Turn?
Stock Turn is a key measure to show the efficiency of the inventory. By definition, stock turn ratio is a measure of the number of times inventory is sold in a time period. Put simply, the stock turn will let us know if our inventory level is relevant to the sales we are achieving over a period of a year.
If stock turn is too low it can indicate we are carrying to too much stock for the sales we are achieving. A higher stock turn is generally an indication of a healthy business and the inventory is being put to work efficiently and showing that we are investing wisely in our inventory purchases. However there is a balance, if stock turn ratio is too high, it could be telling us we are missing sales opportunities.
It is easy to sell a lot when you have a lot, however it’s also a way to put unnecessary pressure on cash flow and tie up cash that could be put to better use. With the correct amount of inventory, you could be achieving the same sales with less outlay on stock.
The most successful Retail Businesses aim to maximise sales on the lest amount of inventory, whilst capitalising on all sales opportunities. This makes them not only profitable, but also helps them to be scalable and saleable!
How is Stock Turn calculated?
Stock Turn = Sales / Average Inventory for the same period.
The Average Inventory = Beginning Inventory + End Inventory / 2
Retail value, Cost value or Units can be used for these calculations, as long as you use the same for both Sales and Average Inventory. Personally I like to use UNITS in the calculation, as the value is always the same.
Lets look at what this looks like in real terms.
Annual Unit Sales are 5,000 / Average Units on Hand is 1,000. Stock Turn = 5
If your Stock Turn is lower than 1 it means the Ave Stock level is greater than your sales, you have a problem and it will effect all parts of your business. It also means your inventory cost is very high and everyone in retail knows, cost of stock is a business killer !
It is important you understand the optimum Stock Turn for your industry to ensure your expectations are realistic.
How can you increase your Stock Turn?
There are many ways to increase your Stock Turn. There is a science to bringing stock turn ratio to a healthy number, it will be pulling a few different levers. It’s also about understanding which levers you should pull.
A good start is creating a plan of how you are going to achieve the budget required to pay your bills and make a profit!
One way is via a category plan using sales forecasts to ensure the product mix is correct.
From this you can create an option plan or “shopping list” to ensure your purchases are inline with the plan. Then be disciplined in your buying. Of course shifts in trends need to be considered and in the calculations.
Flow purchases in accordance with sales plan so you minimise the time stock is sitting on the shelve. Replenish quickly if possible.
Have a marketing strategy and an exit plan so you manage the markdowns effectively to minimise time slow moving stock is hanging around and minimize profit loss!
Build a clear structure and process around purchasing to create optimal Open-to-Buy. This will keep you disciplined.
Being more proactive, rather than reactive is a core strength of successful Retailers.
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