Understanding Your 10 Most Valuable Inventory Metrics

Metrics equal money. This goes beyond ad impressions, website clicks, and form fills. In order to make the best decisions that impact your retail business’ bottom line, you need the ability to derive actionable insights from a full scope of business data. The first step to leveraging this data is understanding the key metrics that inform it.

Retailers and eCommerce businesses are known to use data from various sources to track and evaluate their performance such as website analytics platforms or customer relationship management software. However, a primary source of analytical insight may be found right under their nose! By keeping an eye on the following inventory metrics, retailers can develop reliable  key performance metrics (KPIs) to build long-term strategy around:

1. Inventory on Hand

The amount of stock physically present in your warehouse/storage location. It’s important to remember with this metric that even if a product is sold, it is not subtracted from inventory on hand until it physically leaves the warehouse, so this number will usually be higher than your available inventory. (This definition is based on industry standards, though some customers do measure it differently).

2. Inventory Turnover

Your inventory turnover (total sales / average value of inventory on hand) helps you track how quickly you’re  replacing inventory. The higher the turnover, the less time your inventory spends collecting dust on your shelves (and the less money it costs you by doing so).

3. Sales Velocity

Demand planning is a key part of running a retail business. By tracking how well your product sells when it’s available to consumers on the shelf (sales / distribution), you can plan accordingly for order fulfillment and avoid out-of-stock situations.

4. Days of Supply

Your retail business runs on the goods you have to sell, so knowing the number of days it would take to run out of supply if it was not replenished (inventory on hand / average daily usage) is essentially as useful as tracking your cash burn rate. This measurement lets you see how much available inventory you’ll need in order to maintain normal operations for some period of time if a supply chain disruption or shipping error were to occur.

5. Sell-Through Rate

Here’s where your analysis gets a bit more big picture. This is a comparison of the amount of inventory you receive from a manufacturer or supplier against what you actually sell to your customers (sales / stock on hand). You can use this metric  to examine products against each other as well as evaluating how a specific product does month over month.

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6. Cost Per Unit

When you’re setting pricing you need to ensure the amount you charge is aligned with the value you provide and the return you need to make a profit on each customer. To measure the latter, you must measure all the costs to build or purchase one unit of product (variable costs + fixed costs incurred by a production process / number of units produced).

7. Revenue Per Unit

This metric is critical when considering where you might improve, expand, or pause production.  To determine your revenue per unit, take the total amount of revenue a product generates, divided by the total number of units of that product sold.

8. Cycle Time

The nature of selling goods is quite cyclical. By understanding the total time it takes from when an order is first issued until it is completed you can set realistic expectations with customers.

9. Gross Profit

Your company’s gross profit is equal to its total revenue minus its cost of goods sold. Many small to medium-sized retail businesses operate with a gross margin in the range of 25 to 35 percent.

10. Gross Margin

From there you can determine your gross margin, or the percent of total sales revenue the company retains after paying the direct costs associated with producing products ((total sales revenue – cost of goods sold)/total sales revenue).

BONUS:  Average Age of Inventory

The average number of days it takes a retailer to sell a product to consumers ((cost of inventory at its present level / cost of goods sold) x 365) is measured by the days of each year. The older your inventory is, the more it’s costing you. If a product’s average age of inventory exceeds 120 days, it’s time to drastically reduce price, consider bundling it, or use whatever means necessary to get it off your shelves.

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Once foundational elements like trustworthy data, intelligent technology, and solid financial processes are in place your retail business will be situated to scale. With these eleven metrics, you’re on the right track to forming a data-driven strategy that will empower smarter decision making for your business.  For more helpful metrics and terms that will help you steer your company to success get your free copy of the Accounting Alphabet for Business Owners and CEOs.