Ep. 20 Why Inventory Management is so Important

Many independent retailers will look at their monthly sales, watch the numbers go up and down, but be completely stumped about the state of their business. They aren’t able to describe what’s going well, what isn’t, or make decisions. 

You can’t improve what you don’t measure. And one of the most critical things you need to measure in your business is also your most important asset: your inventory. 

The best marketing is having the RIGHT merchandise. That’s why you have to do the math to make informed inventory decisions. Let’s look at some inventory basics.

Inventory 101

When I first started as a shopkeeper, I jumped right into selling. I only used my point-of-sale system as a cash register. I could total up transactions and collect payments, but I wasn’t utilizing all of the tracking and analytics options available. 

If this sounds familiar to you, please know I’m not judging you! But I do want to encourage you to enter information about your inventory into your system so you can use it to its fullest potential. 

You can use your POS system, an inventory app in Shopify, or a completely different system that syncs with your POS (such as Shopventory). You could use a spreadsheet if you have a booth in a vendor mall or a small, manageable amount of inventory.

Once you’ve chosen a system, you’ll need to fill in the relevant fields. Here are the four most crucial areas: 

Categories/Classifications

This is a broad classification. For instance, a fashion boutique might have categories like tops, bottoms, shoes, dresses, and jewelry. Our home decor boutique uses categories like furniture, home decor accessories, gifts, creative workshops, baby boutique, holiday, markets, and custom services.

You can have subcategories, but your MAIN categories should be a manageable number (preferably 10, but try to keep it under 20 if you need more). This might not make sense to you now, but just know that analyzing inventory data can get complex, so we want to keep it as simple as possible. A manageable number of categories will help with this. 

COGS

This is the actual cost of the item. If you’re new to shopkeeping, COGS stands for Cost of Goods Sold.

Retail Price

This is the price you sell the item at.

Date

The date you add the item to your inventory is important. You might not have a field in your system to document a date, but I know some systems recognize the date when you enter it into the system.

There are also fields for quantity, SKUs, variations, barcodes, and a description. 

What Your Inventory Data Can Tell You

Once you enter those pieces of information, here are some metrics that you can calculate with your inventory data:

Profit Margins

Your profit margin tells you how much profit you earned for each item. It’s a percentage that shows the difference between your retail price and your COG.

In retail, a 50% gross margin is what most shopkeepers hear they should strive for. You should shoot for 50% profit margins or higher. 

Inventory Turn

Turnover is a calculation that measures how fast you sell through inventory and need to replace it. The quicker a retailer “turns” its inventory, the more it’ll need to buy or make in a year.

Your inventory plan is grounded in turnover. The faster your turnover, the better your cash flow. You make money by selling more with faster turn!

Turnover is calculated as Sales / Average Stock = Turnover Rate.

For example: if you sold $50,000 worth of product and had $25,000 worth of inventory in that same time frame, your inventory turn would be $50,000 / $25,000 = 2. That means you turned over your inventory two times during that period. 

A turnover rate of 2-4 is considered good, while 5-7 is even better. A higher turnover means you are selling more merchandise relative to your inventory, which leads to lower storage costs. If your inventory is turning too quickly, though, you’re not buying enough or at the correct times.

Most retailers don’t set turns at the same level for every product or category, as it’s common for products and categories to sell at different speeds. That’s why having distinct categories is so important.

Age of Inventory 

Look at old inventory as an expense. If you don’t know the age of your inventory, you may not make the effort needed to get the old stock out the door. This is why adding the date field to your system is helpful.

If you need ideas on getting rid of old inventory, check out this podcast episode on how to make decisions about stale inventory.

Open to Buy

The next reason an inventory system is essential is if you want to implement open-to-buy. You can’t use open-to-buy if you don’t have a comprehensive inventory system. 

You know the expression—don’t put the cart before the horse! Get started on your inventory FIRST.

To summarize, inventory is your most crucial ASSET. Don’t neglect it or avoid setting up a system for it! Once you run some of the reports through your inventory system, the data might surprise you.

Resources

• Shopkeeper Shoutout: Laura of Brushed Design Co.
• Square inventory tracking system
• Shopventory: inventory management system that syncs with multiple POS systems 

Timestamps

• [01:05] Shopkeeper Shoutout
• [03:03] Inventory 101
• [07:59] What Your Inventory Data Can Tell You