How to make inventory turn increase your profits
Simply said, the more you can increase the inventory turn, the higher your ROI will be. Your ROI is the return on the investment you have made in your business. Not the investment of time and effort, but simply the investment of money that you have made. Let’s take a look at an example today from Michelle’s Pharmacy.
Inventory turn is a method of calculating how many times over the course of a year you manage to sell your inventory. As an example, if there was a pain reliever that you knew you sold 24 of during the course of a year, there would be several ways you could handle this. One would be to order 24 of the product at the beginning of the year, and you will have plenty on hand for all of the customers, assuming an expiration date would not be an issue. The down point to this is that your inventory turn would be 1.0 as you had sold the 24 you ordered only once during the year.
Another way of solving this would be to order the pain reliever 2 at the start of the year, and when one is sold you would have one left. You would also order one more so that there would always be one on the shelf. This would give you an inventory turn of approximately 12 times a year. This change from 1 to 12 will greatly improve your ROI. Now, imagine being able to do that with everything in your pharmacy.
With the first example, you are going to have to expend the necessary dollars at the start of the year to order all 24. With the second example, you are only paying for two and the rest of the money can be invested in other aspects of your business.
Simply said, that is inventory control. Unfortunately, it does not work quite that easily. There are several factors that come into play. The first is that this may be an item you have to purchase in a case of 12 so the idea of a small order is eliminated. The second factor is that you are not likely to have an item of which you sell one every 15 days; you may have a month in which you sell none and then a week in which you sell 5.
The challenge with keeping the inventory as low as possible is that you can find yourself without any inventory on the shelf as a customer comes to your business as well as having a counter that looks rather sparse as you keep only a bare minimum of inventory on the shelf. All of these are factors to be considered as you determine how much to order. Definitely the answer is not to order product by the case so that you have nothing to worry about; a low ROI is definitely something to worry about.
The last factor is that of special buys that you are offered from vendors. This may come in the form of a reduced price, free freight, extended dating on the invoice or other incentives provided by the vendor. Any, and all of these incentives can change the actual cost of an item.
Too many think that the exercise necessary to make the determination of how to buy is too complicated to spend their time on. That is why we looked at the ROI in the last issue. If time is money, then you should know just how much money.
As there are not these special buys being presented to you every day, the simple way of calculating necessary inventory can be done with this equation:
1 Quantity on hand on the first day of the month
2 Subtract the anticipated quantity to be sold
3 Subtract the quantity needed on hand to start the next month
4 The answer is the number you need to order to produce the anticipated sales for the month.
It is the aspect of the special buy from the vendor that could possibly sway you from ordering on the ‘as needed’ basis. We do have, however, a tool that can assist you in making that determination on how to purchase inventory. The website, profitsplus.org, has a series of free calculators that can assist a business in making the decision that creates the right balance. Take a look at the ‘cost of inventory’ calculator as well as the ‘return on investment’ calculator. You may be amazed at what you learn about your inventory control.