There Is So Much Profit Hidden In This One Word. The following is a true story. The names have been changed to protect the innocent idiot.
Pat owned a toy and children’s clothing store. After a great year in which she was up about $42,000 from the previous year while maintaining the same expense structure, Pat was looking forward to seeing her accountant. “There will be good news,” she thought.
Don, the accountant, met her at the door of his office. “Congratulations on a great year,” he began, “I’ve got good news and bad news for you. The good news is that you obviously had a sales increase. The bad news is that you owe taxes.”
Pat sighed. “How much?”
He replied, “More than you have in your account, I’m afraid.”
I was horrified. (Okay, this story actually happened to me.) In my giddiness over my increased sales, I hadn’t paid enough attention to my inventory levels. My inventory levels had increased significantly. This also impacted my profits.
It was my introduction to the importance of turn.
Turn. Retail Turnover. Stock Turns. It is all the same. What is it?
It is one of those things that people know that they should pay attention to and improve….but don’t know how. Right?
It refers to the number of times each year the inventory in your store sells completely through or out. More turn is good, because every time you sell an item you recoup its cost plus earn the profit you need to pay yourself and your business expenses. Think of it as one of those big spin wheels of fortune. Every time you sell an item it is like it goes past the arrow at the top and the cash gets spun off. So the faster it spins or the faster the item sells, the more cash you get.
Annual Sales (at retail without sales tax)
The optimum turn varies for different stores. (Most importantly it varies between the different types of inventory in a store.) For an entire toy store, a good turn is about 3.4 times per year. For a women’s clothing store, I want to see a turn of 4 times. The optimum turn means that you are maximizing your cash flow and getting more cash out of your store.
How To Get More Cash
Always remember that turn is just a fraction.
This is the key to understanding how to change it. Also Turn is determined over 13 months; it is more about the whole journey than it is about one three-month selling season.
We will look at both the top and bottom of the fraction. You can increase turn one of two ways.
- Decrease your average inventory (the denominator of the fraction). If 6/6 =1, and we wanted to increase the turn of 1, we would keep less inventory like this: 6/2 = 3.
- Keep the same inventory but increase sales (the numerator). If 6/6=1 and we want to increase the turn, we could increase the sales like this: 18/6 = 3.
There are 3 specific strategies that you can use. I will discuss one this week and the other two next week. I will also share actual examples of how my clients put more money in their pockets using these tips.
KEY #1 Keep It Simple
Let’s use an example of a gift store. They should strive for a turn of 3 times per year. You have probably heard what the turn rate should be for your store. You have probably been told the wrong number. Let me know if you want to know what your number should be.
What I do for clients is take information and turn it into action steps that give them profit. What does a 3 time turn rate really mean? That means merchandise should be sitting on your shelves for about 17 weeks ideally. I determined this by dividing the number of weeks in a year – 52 – by the desired number of turns in a year – 3. (52/3=17) So simple.
If an item is in your store for too long, it is turning too slow and not making the money it should for you. On the other hand, if you are constantly out of an item, it is turning too fast. You are missing opportunities for sales and thus losing money. Your goal is to find a balance and maximize the flow of cash for your store. I can help you.
Your first specific action step should be to identify those items that you have had for longer than the ideal number of weeks. Group them together and mark them down! Put them on sale and get cash out of them NOW.
There is a science to moving these items out quickly. For items that you plan to continue to carry forward – recognize that you have too much of them and need to weed them out. These items will only be marked down 25% and for a limited time. I suggest 3 days. The items that you have had longer than twice times the ideal time period MUST be marked down 50%. Merchandise that is older than that MUST be marked down 75%.
Remember, merchandise is not like fine wine – it does not improve with age. It turns to vinegar………. and stinks up the place!
NO BIRTHDAYS ALLOWED! Don’t allow any items to have birthdays in your store.
Do not worry about losing a bit of profit now – we are concentrating on cash flow right this second. I will address how to regain the profit margin next week.
Case Study: A client’s sales had decreased $10,776. During the same time period, their turn had increased from 2.72 to 3.34. It is easy to only see the decrease in sales here I know. But let’s look at the impact of the increased turn – which means that they were operating with less inventory.
Their average inventory decreased $50,500 of inv at retail – for them that translated into $23,735 more cash for them!
What would you do with $23,735?
We can show you how to put that kind of money into your bank. We do it every day with clients. This topic has so many variations based on your specific situation. Send us an email at email@example.com and let’s set up a time to chat.
You deserve to know exactly what YOU can do to get better.
Read Part 2 Here… Don’t Ignore Turn (I know YOU don’t!)