What are the financial metrics to track when managing inventory?

Managing inventory in your business involves keeping track of certain financial measures. Let's break down these metrics without the jargon and provide practical examples: Inventory Turnover Ratio: - What it Measures: How fast you sell and replace your products. - Formula: (Cost of Goods Sold) ÷ (Average Inventory Value) - Example: If you sold $100,000 worth of goods and your average inventory during that time was $10,000, your inventory turnover ratio is 10. - Practical Action Takeaway: A high ratio is good; it means you're selling products efficiently. A low ratio may indicate excess inventory.

A high inventory turnover ratio can indicate that your business is efficiently managing its stock, which can ultimately lead to increased revenue and profit margins. However, it's important not to make the mistake of focusing too heavily on inventory turnover without considering customer demand. It's essential to strike a balance between an optimal inventory turnover ratio and an awareness of customer needs and preferences within your industry.

- What GMROI Measures: The profit generated from your inventory investment. - Formula: (Gross Margin Percentage) X (Inventory Turnover Ratio) - Example: If your gross margin percentage is 30% and your inventory turnover ratio is 10, your GMROI is 300%. - Practical Action Takeaway: Aim for a high percentage by increasing sales revenue and reducing inventory costs.

A key component of running a successful business is managing your inventory efficiently. Keeping too much inventory on hand can actually be detrimental to your bottom line. The DSI ratio measures how long it takes for a company to turn their inventory into sales. The goal is to minimize this ratio, which can be done by increasing your sales volume and reducing your inventory level. Not only does this help free up cash flow, but it also allows you to better respond to changes in market demand. With strategic planning and execution, you can minimize your DSI ratio and increase cash.

What DSI Measures: How long it takes to sell your inventory on average. - Formula: (Average Inventory Value ÷ Cost of Goods Sold) X (Number of Days) - Example: If your average inventory is $5,000, your COGS is $1,000, and the period is 30 days, your DSI is 150. - Practical Action Takeaway: Minimize this ratio by boosting sales volume and lowering inventory levels.

- What EOQ Measures: The optimal order quantity that minimizes total inventory cost. - Formula: Square root of [(2 X Demand Rate X Ordering Cost) ÷ Holding Cost] - Example: If your demand rate is 1,000 units, ordering cost is $50, and holding cost is $2, the EOQ is approximately 141 units. - Practical Action Takeaway: Find the balance between ordering frequently in small quantities and ordering infrequently in large quantities.

When you're running a product-based business, it can be easy to focus on the more exciting aspects of your brand: marketing campaigns, designing new products, and keeping up with the latest industry trends. However, there's one crucial area that you absolutely can't ignore: your inventory levels. Keeping an eye on your metrics and regularly reviewing your sales cycle can provide valuable insights into how your business is performing and where you may need to make improvements. Whether you need to adjust your marketing strategy, streamline your operations, or simply reorder some popular products, paying close attention to your inventory levels can help you stay on top of your game as a business owner.

- What it Measures: The relationship between your inventory level and sales volume. - Formula: Inventory Value ÷ Sales Revenue - Example: If your inventory value is $8,000 and your sales revenue is $16,000, your inventory to sales ratio is 0.5. - Practical Action Takeaway: Adjust according to demand and supply fluctuations.

As a product-based business owner, it's no secret that managing cash flow is one of your biggest challenges. You need to invest cash at the start of your sales cycle to create and manufacture your product, but it can take time to collect cash from customers once they purchase. This delay between your outlay and the start of revenue can be a major contributor to cash flow problems. It's crucial to stay on top of your funds and manage your cash flow in this process. By keeping a close eye on your finances and finding ways to speed up your collections process, you can help ensure that your business stays healthy and profitable and that the cash supply does not dry up.