Inventory Turnover

Inventory turnover answers one plain question about your shelves, which is how many times you sold and replaced a product over a year. Say your shop keeps ten kettles on hand and sells sixty of them in twelve months, so that item turned six times. Buying, selling and buying again is what counts as one of those turns.

The sum behind the number is easier than it sounds, because it needs only two figures you already have. Take what the goods you sold cost you over the year, meaning the price you paid the supplier and not the price the customer paid. Divide that by the average value of the stock you held, so six hundred thousand of sold goods against a hundred thousand on the shelves gives a turnover of six. Many owners prefer the figure in days, so they divide 365 by six and see each item waiting about sixty days before it leaves.

One number for the whole shop is close to useless, so the report only earns its keep when you read it line by line. Do that and you find a few products that turn twenty times a year, plus a long tail that turns once or never. That tail is dead stock, which is money you already gave a supplier and which now sits in a corner paying rent along with you. In the shops Linkysoft works with, it is usually longer than the owner expects.

Here is the part that surprises people, because a very high turnover can be bad news. A product that turns forty times a year is one you keep running out of, and an empty shelf is a customer who bought it somewhere else. So read turnover beside your out-of-stock days and beside your margin, never on its own. A slow item you sell at triple what it cost can earn more in a year than a fast one you barely mark up.

That is why Storek sorts a stock list by days since the last sale rather than alphabetically. The sleeping lines then rise to the top, where somebody has to look at them and decide. When Linkysoft is asked to build a web application for a warehouse, the first thing we ask for is two years of sales history. It usually shows that a quarter of the shelf space earns almost nothing, which is the conversation to have before any software is written.