Critical Numbers – Your Stock Turn
If your business has stock or inventory for sale it is essential you understand what stock turn is and how to increase it. Slow-moving, obsolete or ‘dead’ stock will seriously reduce not only your cash flow but your ability to increase profit. The longer your stock takes to sell, the longer you have your cash tied up in this stock before it can be sold for a profit for you. Worse, in most cases, the older the stock, the less likely it is to sell for your original retail price.
Here’s the formula to calculate stock turn:
Stock turn = Cost of sales* / Average stock held^
* The simplest way to calculate ‘cost of sales’ is opening stock + annual purchases – closing stock (where purchases includes all variable costs that show in your trading account)
Average stock is your opening stock at the start of the financial year plus your closing stock at the end of the year divided by 2.
Cost of sales $150,000
Average stock $45,000
Stock turn 3.3 times
In other words, every year you are, on average, selling every item of stock 3.3 times.
So how might you increase your stock turn?
your stock levels – in the above example, if stock was reduced by $10,000,
stock turn would increase to 4.3. As the owner you’d free up $10,000 of
cash and at the same time be making your average margin one more time on all
stock on average per year
- Buy stock
on consignment – you only pay when it sells
‘just in time’ – if you’re selling, on average, 5 of a particular item per day
and it takes 2 days to be received after an order is placed, only hold a
maximum of 10 of that item in stock
display stock – if a customer wants to buy that item have it delivered straight
from your supplier to your customer
- Use a
catalogue – provide less stock in store and give customers the ability to order
via your catalogue
ordering levels – ideally calculate the stock turn by stock item using the
above formula just for that item. Then you’ll see the slow moving stock
so can reduce how often you re-order it
stocking slow moving stock altogether
- Tell your
sales team which stock items sell more quickly and encourage them to sell those
- Get rid of
obsolete or dead stock – you are better off to have cash from a discounted sale
reinvested in faster moving stock
- Ask us for 10 more ideas!!
‘The difficulty lies not so much in developing new ideas as in escaping from old ones’ – John Maynard Keynes