Make more money with these EASY inventory and cashflow management techniques!
By arming yourself with a few simple techniques, you can manage your inventory levels and avoid a cash crisis. Let’s start with the budgeting basics.
The first step is projecting your monthly sales. It’s good to do this for at least a six month period, but a full year is best. If you’ve been in business a while, you can use the sales figures from the prior year. If you’re new, you can use the numbers from your business plan, or make informed estimates.
The next step is determining how much inventory you need to operate your shop. For apparel and accessory boutiques, you want to “turn” your inventory two to four times within the year. What this means is that if you project annual sales of $500,000 at cost, you will need between one fourth and one half of that amount on hand in inventory. If your inventory is $125,000 and your sales are $500,000 at cost then you have “turned” your inventory four times. $125,000 times 4 is $500,000. If your inventory is $250,000 and your sales are $500,000 at cost then you have “turned” your inventory two times. $250,000 times 2 is $500,000. The higher the turn, the better because you can generate the same profit with a smaller investment. However, a turn between two and four is considered good. If you have historical data, you can calculate the prior year’s turn and use that number. For our example spreadsheet template, we use a turn of three. Please note that we are referring to the annual sales at cost, that is, at the cost of the merchandise that is sold; not the retail sales price.
Once you’ve assembled your sales forecasts, you need to determine your gross margin percentage. This is a fairly easy calculation. Gross Margin is the amount of profit you have left after you pay for the cost of the merchandise you sold. For example, if you purchase a necklace for $40 wholesale and sell it for $88 in your shop, your gross margin is 54.5% - $88 is the retail price, $40 is what you paid for the necklace at market (also called Cost of Goods Sold or COGS) and the remaining $48 is the Gross Margin. $48 is 54.5% of $88 (48 divided by 88.) The Gross Margin money is then used to pay your overhead expenses like rent, utilities and salaries.
To be sure you have enough gross margin to cover expenses and leave some profit, you need to be sure you’re using the correct markup formula for your shop. Markup formulas can vary widely by merchandise category, customer base and even geographic location. A good starting place is the double markup, also called the Keystone Markup. That means that you buy a bracelet for $20 and sell it for $40. Easy enough! However, the keystone markup doesn’t allow any wiggle room for promotions and markdowns. It would be great if you could sell every single item you purchased at the full retail price, but this isn’t reality. So, to cover for markdowns, damages and inventory shrinkage, we suggest you use the 2.2 markup system.
The 2.2 markup system is simple. You purchase a pair of earrings for $15, you price them at $33. $15 times 2.2 equals $33. Easy. This markup formula will cover promotions, discounts, markdowns and shrinkage as long as you’re able to sell roughly 80% of your goods at full retail. You can always make adjustments to this formula if your shop is in a very high rent area or you run frequent promotions. If this is your situation, you may want to consider a 2.4 markup or even higher. You can always experiment with the markup until you feel like you’ve gotten it right. Price your items too low and you’re leaving profit on the table, price them too high and you won’t be able to sell enough merchandise.
Once you’ve assembled your sales forecast and established your markup formula, you can determine how much inventory you will be able to buy when you go to market. This shopping budget is called Open to Buy or OTB. By using our simple template, you can easily see how much you can spend for each month.
Looking at the template, fill in the yellow highlighted areas. Start with the Markup Formula. We suggest starting with 2.2 if you don’t have solid historical data. Next, fill in the monthly projected sales at the retail selling price. The template will automatically calculate your Cost of Goods Sold. We are making the assumption that you will have some promotions and markdowns, but that you will sell roughly 80% of your merchandise at the full retail price.
Next, you will need to estimate your monthly inventory levels. To do this easily, look at your sales projections. If December is projected to be your biggest month, then it makes sense that you will need more inventory at the beginning of December. You can play with the numbers here to be sure that your average monthly inventory is near your target amount. Once all the yellow numbers are in, you can see the Open to Buy amount for each month. This is your buying budget. If you stay on budget, you’ll have the right amount of inventory on hand to support your projected sales, and also avoid those nasty credit card statement surprises!
Please note: this system can be used for your entire shop, or for individual categories of merchandise. For example, necklaces, bracelets, earrings, etc.
To learn how to keep more money in your pocket, CLICK BELOW to access our FREE template.
For detailed information on this subject, we love https://www.retaildogma.com/otb-retail/