Inventory Turnover...So What?!

We had an inquiry recently from a three-store owner asking about inventory turnover.

"Is it really important?" he asked.

Our reply, after being struck by the question, started out as less than adequate, to be sure. We explained the formula (Cost of Goods Sold divided by Average Inventory @Cost) and he politely agreed.

Then we explained the difference that turnover rates can make:

• "For example, for every $1 Million in sales at 40% margin, the COGS would be $600,000. If turns were 3, average inventory would be $200,000.
• "But – if turns were 4", we continued, "inventory would be $150,000, helping cash flow by $50,000."

Again, he politely agreed. Then, after a pause, he asked, "But, is it really important?" 

Finally, we got it! And our answer improved.

Key Number Each Month

An Open-to-Buy system that uses turnover rates as the "governor" projects not only the buying budget for each month. It also projects the targeted ending inventory levels for the end of each month.

"Like the white or yellow lines on highways," we offered.

"Wow!" came his reply. "You mean that our buyers should steer their inventory levels to hit those planned ending inventory numbers?"

"Well, that's what the pros do," we responded.

"Hmmm.  Now I see how it's all connected!

"Hitting those ending inventory targets will control my inventory levels. That will help the cash flow. And that will reduce our debt. All of which will help me get some sleep at night!! 

"Guess turnover IS pretty darn important!"

Then we tossed out the classic line from Michael Gould of Bloomingdales, who so famously told his buyers: "No retailer ever filed bankruptcy because their turns were too high."