5-Steps to Calculating Your Inventory Position
Retail inventory management is essential for optimizing cash flow and maintaining customer satisfaction.
This guide presents a step-by-step approach to calculating your retail inventory position. You’ll learn strategic insights and methods to drive significant improvements in your business operations.
Step 1: Determine Your Cost of Goods Available for Sale
Start by calculating the total cost of your goods available for sale. This includes your beginning inventory plus any purchases made during the period. This step provides a foundation for understanding the total value of your stock at any given time.
Calculating the total cost of your goods available for sale may sound complex, but it's actually a straightforward process. Here are the simplified steps to guide you:
Start with Beginning Inventory: Note the total cost of all inventory you have at the start of the accounting period.
Add New Purchases: Include the cost of all inventory bought during the period. Include related expenses like shipping and taxes.
Adjust for Returns and Discounts: Subtract any customer returns and add back any items returned to suppliers.
Include Additional Costs: Add any direct costs related to preparing the inventory for sale, such as labor or materials needed for production.
Calculate Total Cost: Add your beginning inventory and all additions, then subtract any deductions to find the total cost of goods available for sale.
This total gives you a clear view of your business's financial commitment to inventory, which is crucial for pricing, purchasing decisions, and sales strategies.
Step 2: Compute the Cost-to-Retail Ratio
Next, calculate the cost-to-retail ratio, which helps you understand what percentage of the retail price is made up of the cost of goods sold. This ratio is crucial for adjusting pricing strategies and maintaining profitability during sales or markdown events.
Calculation Steps
To determine the cost-to-retail ratio, follow these simplified steps:
Understand the Ratio: The cost-to-retail ratio shows the percentage of the retail price that represents the cost of the goods sold. It's a crucial metric that helps you assess how much of the selling price covers the actual product cost.
Calculate the Ratio: Divide the cost of the goods sold (COGS) by the total retail price of these goods. Then, multiply the result by 100 to get the percentage.
Formula: Cost-to-Retail Ratio = (Cost of Goods Sold / Retail Price) × 100%
Mastering the cost-to-retail ratio is key to setting pricing strategies effectively, especially during sales or markdown events. This ratio ensures you maintain profitability even when offering discounts, making it a vital tool in your inventory management arsenal.
By understanding and applying this ratio, you can make informed decisions about pricing and discounts, keeping your business profitable during various sales initiatives.
Step 3: Record Total Sales
Track the total revenue generated from sales. This figure is essential for comparing against your cost of goods to assess overall profitability and to make informed decisions about purchasing and pricing.
To effectively track and utilize the total revenue generated from sales, it's crucial to follow a systematic approach. Here’s a detailed breakdown of how to handle this process:
Record Sales Revenue: Keep a detailed record of all sales transactions over a given period. This includes every item sold, the selling price, and the date of sale.
Aggregate Total Revenue: Sum up all individual sales to determine the total revenue for the period. This aggregation helps in evaluating the business’s performance over that time frame.
Compare with Costs: Use the total revenue figure to compare against the cost of goods sold (COGS). This comparison is crucial to assess the overall profitability of the sales.
Inform Business Decisions: Based on this comparison, make informed decisions about future purchasing strategies and pricing adjustments. For instance, if the profitability is lower than expected, consider strategies to reduce costs or adjust prices.
Regularly reviewing your sales data is not just a suggestion, it's a necessity. This practice allows you to adapt to market changes, optimize pricing strategies, and most importantly, improve your inventory management. It's a key step in maintaining your business's profitability.
Example: Tracking Total Revenue
To visualize how tracking total revenue works in practice, here’s an example table for a retail business over a quarter:
Total Sales Transactions: Number of individual sales completed.
Total Revenue Generated: Monetary value of all sales.
Cost of Goods Sold (COGS): Total cost associated with products sold.
Gross Profit: Total revenue minus COGS.
This table helps track and analyze the effectiveness of sales efforts, cost management, and overall profitability on a monthly basis, providing clear insights into financial performance and areas for improvement.
Step 4: Determine Your Open-to-Buy Inventory
Open-to-Buy (OTB) inventory is the amount of inventory you need to purchase to keep your stock at an optimal level. It's the tool that helps you avoid stockouts and overstocking, leading to improved cash flow and profitability.
Calculating your OTB inventory requires you to determine the ideal stock level for your business, as well as your current inventory levels.
To calculate your OTB inventory, follow these simplified steps:
Determine Ideal Stock Level: Consider factors like seasonality, sales trends, and customer demand to determine the ideal stock level for your business.
Assess Current Inventory Levels: Determine your current inventory levels, taking into account factors like sales, returns, and adjustments.
Calculate Open-to-Buy: Subtract your current inventory levels from your ideal stock level. The result is your open-to-buy inventory.
Utilize Inventory Planning Software: Consider investing in inventory planning software, like retail inventory planning software or open-to-buy software. These tools help automate the process and provide valuable insights into your inventory position.
By regularly calculating your open-to-buy inventory, you can ensure that your inventory levels remain at an optimal level, leading to improved cash flow and profitability. It's a critical step in effective inventory management, and utilizing inventory planning software can make the process even easier.
Learn more about Merchandise Planning & Open To Buy Software with Management One
Step 5: Adjust Your Merchandising Strategy
The final step in calculating your inventory position is adjusting your merchandising strategy based on the insights gained from the previous steps. By understanding your cost of goods available for sale, cost-to-retail ratio, total sales, and open-to-buy inventory, you can make informed decisions about pricing, purchasing, and inventory management.
Some key considerations when adjusting your merchandising strategy include:
Price Adjustments: Use the cost-to-retail ratio to adjust prices to maintain profitability during sales or markdown events.
Purchasing Decisions: Utilize the open-to-buy inventory to make informed purchasing decisions that keep your inventory levels at an optimal level.
Inventory Planning: Use the insights gained from these calculations to create a detailed inventory plan that optimizes cash flow and profitability.
By adjusting your merchandising strategy based on the insights gained from these calculations, you can optimize your business operations and drive significant improvements in profitability.
Conclusion
Understanding and managing your inventory efficiently is not just a theoretical concept, it's a practical necessity for the success of your retail business. By following these steps, you can establish a robust inventory system that supports sustainable business growth.
Management One Solutions for Your Inventory Management Strategies
For retailers looking to enhance their inventory management strategies further, Management One provides expert services in inventory planning and financial analysis. Our tools can help you optimize your inventory levels, prevent overstock and stockouts, and improve your profitability.
Discover more about how Management One can support your retail business today.
