Proper Retail Inventory Management Can Increase Sales
Retail stores can increase their sales revenue during the holidays through inventory control. Controlling inventory is especially important during a recession when consumer spending is low. For many small retail businesses, the holiday period is one of the most important sales periods of the year and can literally make or break the business.
If the business stocks up with too much inventory, they can inadvertently cut into any profits that they make due to costs associated with too much inventory. Here's how to have enough inventory, but not too much, without cutting into your sales revenue even in a recession.
- Develop a holiday sales forecast. If the most of your sales occur during the holidays, your sales forecast will be different for the holiday period than for other times of the year because your sales are seasonal. The general sales forecast should be done many months, or as much as a year or two, prior to the holiday season. Forecasting is one of the foundations of your business. Planning ahead is crucial to your firm's success.
- Respond to changing economic times for your company. If the economy is in a downturn, then you have to adjust your sales forecast to compensate.
- How much have your sales been down during the year? How much have your industry's sales been down, particularly your direct competitors' sales? You can look at the data for the retail industry in general. You can also get more detailed information on the competitors broken down more specifically. This will give you an overall picture of your industry's performance overall in the current economy.
- If you look at this type of data, it will help you adjust your sales forecast.
- Analyze the sales for your own company during the economic changes that have occurred. What has happened to your sales during the economic downturn? Do you sell a product or service that is especially sensitive to a change in economic climate? Is yours a luxury good that people can do without? If so, you may experience a large change in sales. On the other hand, if you sell a product or service that is a necessity that at least a portion of the population, your company may do better in the economic downturn.
- Based on these issues, make another adjustment to your holiday sales forecast.
- Take a look at what types of inventory you carry. If your firm sells services and not products, then your inventory is different than the inventory for a firm that sells products. Whatever type of firm you own, you have to adjust your inventory to meet your adjusted sales forecast. Unless your business sales move counter to the economy, then they are probably lower than usual if the economy is in a recession.
- Do you expect your sales to continue to be lower during the holiday season? If so, adjust the amount of inventory you will carry. Remember the 80/20 rule. About 80 percent of your sales come from 20 percent of your inventory.
- Inventory has carrying costs. Carrying costs can be substantial You don't want to pay carrying costs on inventory that you can't sell because of slow sales. Carrying costs include things like storage for the inventory, insurance and taxes, opportunity costs on the inventory you have purchased, and losses due to obsolescence or theft. They can range from 20 percent to 40 percent of the value of your inventory each year, which will eliminate your profits in a hurry.
- You also do not want to have to try to get rid of excess inventory after the holidays. If you have to deep discount it, you will also lose money.
- You do not want to have stockouts. Even though you don't want to carry too much inventory, you also don't want to carry too little inventory because you will stock out. Stockouts result in a loss of customer goodwill. The problem with inventory management is that you have to juggle how much inventory to carry so you won't be stuck with obsolete inventory but you won't stockout. There are costs associated with each issue.
- Follow the money trail and find out which 20 percent of your inventory your sales come from. You can start doing that with your purchasing. Look at your accounting journals for purchasing and sales. What are you purchasing and what is selling? What is not selling? That should be the inventory that is sitting in your store or warehouse and getting obsolete.
- There are two relatively easy ways to follow the money trail with your purchasing decisions. Buy a good inventory tracking software package. Use a point-of-sale software program that will make adjustments to your inventory at the cash register every time you make a sale.
- Divide your inventory up into manageable parts and focus on your productive inventory. Set up a system of classifying your inventory similar to the one found in Inventory Investment. For that portion of your inventory that is productive, which you should be able to determine from Step 7, pay special attention. Start to consider stopping selling the other 80 percent of your inventory that is not productive.
- Use the Inventory Turnover Ratio to verify your results from Steps 7 and 8. The Inventory Turnover Ratio is Sales/Inventory. Calculate the inventory turnover ratio for your productive inventory, slow-moving inventory, and dead inventory as defined in Inventory Investment. You will probably see the inventory turnover ratio decline as you move from productive to dead inventory.
- If you find dissimilar results, go back to your inventory tracking and point-of-sale programs or to your accounting journals and look at your purchasing and sales records.
- Calculate inventory turnover for your dead, slow-moving, and productive inventory as defined in Inventory Investment. It will be an eye-opener!
- One of the best investments you can make, particularly if you are a firm that sells products, is inventory tracking software. It will make your task so much easier and productive.
- Using bar codes and point-of-sale technology at the cash register will help track your inventory.