If your business has stock or inventory for sale it is essential you understand what stock turn is and how to increase it. Slow-moving, obsolete or ‘dead’ stock will seriously reduce not only your cash flow but your ability to increase profit. The longer your stock takes to sell, the longer you have your cash tied up in this stock before it can be sold for a profit for you. Worse, in most cases, the older the stock, the less likely it is to sell for your original retail price.
Here’s the formula to calculate stock turn:
Stock turn = Cost of sales* / Average stock held^
* The simplest way to calculate ‘cost of sales’ is opening stock + annual purchases – closing stock (where purchases includes all variable costs that show in your trading account)
Average stock is your opening stock at the start of the financial year plus your closing stock at the end of the year divided by 2.
Cost of sales $150,000
Average stock $45,000
Stock turn 3.3 times
In other words, every year you are, on average, selling every item of stock 3.3 times.
So how might you increase your stock turn?
Reduce your stock levels – in the above example, if stock was reduced by $10,000, stock turn would increase to 4.3. As the owner you’d free up $10,000 of cash and at the same time be making your average margin one more time on all stock on average per year
Buy stock on consignment – you only pay when it sells
Order ‘just in time’ – if you’re selling, on average, 5 of a particular item per day and it takes 2 days to be received after an order is placed, only hold a maximum of 10 of that item in stock
Use display stock – if a customer wants to buy that item have it delivered straight from your supplier to your customer
Use a catalogue - provide less stock in store and give customers the ability to order via your catalogue
Reduce ordering levels – ideally calculate the stock turn by stock item using the above formula just for that item. Then you’ll see the slow moving stock so can reduce how often you re-order it
Stop stocking slow moving stock altogether
Tell your sales team which stock items sell more quickly and encourage them to sell those items
Get rid of obsolete or dead stock – you are better off to have cash from a discounted sale reinvested in faster moving stock
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