Excess Inventory – Signs You Have it and Equations to Calculate it
Inventory that is slow moving and stuck on the shelf is a plague to your small business.
The cost of inventory is normally the largest expense item on a small retailer’s income statement. There is no question mismanaging this number can make or break your year.
Most small business owners are hesitant to discount or admit to themselves they have excess inventory. They fear moving items to clearance will decrease profits and revenue.
Or perhaps the opposite happens. Owners are constantly placing items in clearance because they need cash to purchase new products, make payroll, or pay rent.
The quick way of determining surplus inventory is by simply looking around your store and noting the sections that are more full than others.
- Do you have products in your store that are more than a year old?
- Are you having an excessive amount of sales?
- Is there a section in your storeroom reserved for seasonal products that didn’t sell during that season?
In the long run, holding on to inventory in hopes that it will eventually sell at full price is costing you more money than selling it at a discount, and purchasing better selling products. Unfortunately, dust is not an asset.
Along with the obvious method of doing a store walk through, you also have the option to use retail equations to get a better understanding of your inventory performance.
Data from your point of sale system will help ensure accuracy when using these equations:
Sales Per Square Foot = Annual Sales ÷ Total Square Feet of Store
The higher the number the better for SPSF.
This equation is used to determine the efficiency of the store in creating sales with the amount of store space available.
If you want to go more in-depth you can keep records of where you stand now compared to years prior, or break these numbers down by department or store section.
Try sectioning your store into four quadrants, and then crunch your numbers with this equation. If one segment is coming out to be much lower than the other three do some investigating to determine which products are reducing your store’s efficiency.
Days Inventory Outstanding = (Average Inventory / Cost Of Goods Sold) x 365
The lower the number the better for DIO.
This equation is used to determine how long it takes to turn inventory into sales.
Your average inventory can be found by adding your beginning and ending inventory cost for a 12-month period and then diving by 2.
Keep in mind your DIO will vary depending on your industry. Compare your number with similar retailers to see where you stand.
Example: If your number comes out to be 91, this means your store sells its entire inventory within a 91 day period, and you average 4 inventory cycles per year.
After you have calculated your DIO – post a short comment below of your retail store and the number you come up with. This will help you and other retailers put their performance into relatable terms.
Here’s an example to help you further understand:
Greg’s Running World
Small shop focused on active individuals that are into running/walking. We sell running shoes, socks, and other athletic apparel.
DIO – 104 days
Dust – as we mentioned earlier – isn’t an asset to your business. By managing your excess inventory, you are helping to bring more success to your store. It really can be that simple. All it takes? Your action steps with the help above to get you moving forward in eliminating excess inventory and bringing more success to your store.
Contributed by BoxFox, a business-to-business marketplace and merchandise valuation platform for independent retailers to buy, sell, and appraise the value of their excess inventory.
Photo Credit: Image provided by BoxFox.co with permission to use.