September 7 2016
If your business operates with inventory, be it a retail brick-and-mortar or a manufacturing company, knowing the key metrics will increase the likelihood of success. Through careful monitoring of your metrics, you will better be able to spot problems that may arise in your business, and you'll be able to make smarter choices in what to offer to your clients -- all helping to contribute to the bottom line.
Inventory on hand
Inventory on hand refers to the amount of inventory or stock you have in your warehouse or store. It's imperative you begin with an accurate count of your inventory as the following metrics are all based on a spot-on inventory.
This number tracks the length of time it takes for you to sell through your inventory on a yearly basis. To determine, divide total sales by the average value of the inventory on hand. The ideal turn rate varies depending on the type of business. Your accountant can help you determine your target turnover. It's a vital number because product sitting on shelves is equal to stacks of cash collecting dust.
This number tracks how many times you turn your stock in a year. Find it by taking the total sales and dividing by the value of the inventory. Where profitability is concerned, it's one of the most vital numbers you can track.
Days of Supply
The number of days a given quantity will last under certain conditions. In other words, how long your inventory will last without replenishing.
Unlike inventory turnover, the sell-through rate is a monthly calculation found by dividing the sales for a given month by the stock on hand. If the resulting percentage is too high, it means you have too little inventory (or you priced too low). If the number is small, you probably overbought. The sell-through rate is more important to track for a vendor than a retail shop.
Cost Per Unit
To find the cost per unit, add the variable costs and fixed costs incurred by a production process, and divide by the number of units produced.
Contribution (Revenue) Per Unit
Simply put, it's the profit on an item once it's sold after all variable expenses pertaining to this item have been taken out. Knowing this will help you price accurately. To calculate, take your total revenue and subtract out your total variable costs, then divide that result by the total number of units sold. If you're a company selling only one product, this figure will tell you what you need to sell to break even.
This refers to the amount of time it takes to fill an order -- from the time the order comes in until the order ships. To better audit your systems, you can break the cycle time into the various stages of the lifecycle of an order. For instance, how long does it take for the order to come in until the time it reaches fulfillment; once the order is filled, how long does it take to reach the shipping department. Analyzing these smaller segments can pinpoint issues in every stage of inventory and fulfillment.
Total revenue minus cost of goods sold.
Total sales revenue - cost of goods sold / total sales revenue
Average Age of Inventory
This one is the golden ticket. When you review aging reports, pay attention to items that haven't sold in 30-60 days. Those items collecting dust on your shelves are like stacks of cash. You have cash tied up in items that aren't moving. Consider a sale to move them, and then decide if you should carry them in the future.
Item Fill Rate
This refers to items ordered versus items filled. The lower the percentage, the more out-of-stocks you have, thus signaling that you have an inventory/ordering shortage that needs correction.
Monitoring your metrics is only one part of a financially healthy company. If you'd like to know the key metrics you should be tracking in your business, contact us for a consultation.
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