Purchasing and Controlling Retail Inventory

If you are in the retail business, effective inventory control and decision making is one of the most important factors determining your success or failure. A small retail business can't afford to make serious mistakes with its inventory.

Stock Turnover

The speed at which stock turns over (usually measured as the number of turns per year) has a direct influence on the quantity and balance of your inventory. Slow stock turnover is a drag on your inventory. It ties up cash in slow-moving items and will probably mean that you will be forced to markdown (discount) the selling price of these items in order to clear them out.

On the other hand, you can maximize the stock turnover rate of a particular item simply by stocking very little of it. If this item is a popular or hot seller, however, this will mean that you will lose sales and customers if the stock runs out.

Optimum stock turns vary, depending on the type of product you are selling. Here are some industry norms:

• Women's Clothing Store: 6.8 times per year
• Grocery Store: 20 times per year
• Furniture and Appliance Store: 5 times per year

You should set up objectives for your stock turns. Subdivide merchandise into logical classifications or departments and establish a realistic average for turn rates on each classification. This will help determine which products are fast and slow sellers, how much you should reorder, and whether you should continue or discontinue selling certain product lines.

For further information on calculating stock turns, refer to chapter One of EDT's Financial Planning for a Small Business.