Stock turnover is defined as the number of times during a specific period, usually one year, that the inventory on hand is sold. At a time like this a slow stock turn means that cash flow is lying on the shelves. It is not being turned into cash to pay your creditors and is a recipe for going bankrupt quickly.
In addition to cash flow, a high level of stock turnover in a business has several advantages for any retailer:
Merchandise on the shelves is always fresh.
Losses due to changes in styles and fashions are reduced.
Costs associated with maintaining stock, such as interest, insurance, breakage are lessened.
Your store has a limited amount of space. It must always be your objective to get the most profit per square foot out of your valuable space. Slow movers tie up valuable space.
A quick stock turn results in good cash flow and the ability to take advantage of discounts offered by suppliers;
Stock turnover can be calculated in units or in dollars, either at retail or at cost price. Most retailers who keep stock on the computer at cost price adopt this cost price method of calculation.
FORMULA FOR CALCULATING YOUR STOCK TURN
Cost of goods sold during the year
Stock Turn = -------------------------------------------------
Average stock on hand ( at cost )
End of year stock figures are most frequently for this calculation used but it is preferable to use averages of the stock holding at both the start and the end of the year. Levelling out the high and low stock levels held during peaks or slow months will give you the yearly average.
Different businesses have different levels of stock turn and you should ensure that you are in line with those retailers selling similar products. Do not compare your stock turn with that of a fashion store or hardware store if you are a toy store. Each is different.
How can a small retailer maximise their stockturn?
If you are not achieving the average turnover for the industry or would like to improve your stock turnover there are a number of ideas that you should adopt including:-
- Reduction of your range and ensuring that the optimum range is carried for your strongest and most profitable product groups;
- Elimination of slow selling items. It is critical that you identify your best selling items promptly;
- Maintenance of a minimal stock of slow sellers or” have to keep lines”;
- Efficient and timely buying;
- Doing business with reliable distributors;
- By Allocating prime selling positions to your best selling classifications.
Be careful - despite the advantages of high stock turnover, there are instances in which it can adversely affect profits:
- Purchasing units in small quantities can increase merchandise costs because quantity discounts may be lost and transportation charges may rise.
- A high turnover rate can result in low width and or depth of assortment thus reducing variety to the customer. One then has the decision of measuring lost sales against high turnover.
- If prices are reduced simply to move stock quickly, a high stock turnover can result. You can be left with a range of poor width or depth reducing variety to the customer.