Part V — 10 Ways Inventory Management Can Make or Break You.
Our next topic, ”Do You Know How Turnover Can change your Profit Margin, Part V” in our series - 10 Ways Inventory Management Can Make or Break You — will show you that product movement can be deceptive if you do not look closely at the profit margins assigned to each product. Continue reading below to find out specifically what we’re trying to say.
If you haven’t read Parts I-IV of this white paper, click here. If you wish to read this white paper in its entirety, click here for a printable PDF. If you’re interested in learning more about our products – CMS Professional V12 and Denali – and our inventory control and management system, click here.
Part V: Do You Know How Turnover Can Change Your Profit Margin?
Imagine you have two existing products, product A and product B, and you need to drop one of them to make room for new product C. Clearly the decision would be based on which current product was generating the most revenue. However, what if product A was generating a gross margin of 40% but product B only 20%, which product would you drop? Product B, right?
If you made the decision just based on the gross profit alone you may be dropping the more profitable product. The rate of turnover can change the scenario. Even at a lower profit margin product B may be a much more profitable product if the turnover is higher than product A. For example, if both products retail at $100 then each time product A is sold you have made $40 of gross profit and each time product B is sold you make $20 of gross profit. In a single month if 2 of product B are sold and only one of product A then they each have generated $40. However, if three or more of product B are sold for every one of product A, then product B actually generates more money and greater profit or revenue for your business and it should be kept despite product A’s higher profit margin.
The size and space a product takes up is also a factor. If you have limited space, you may determine to keep product B simply because it takes up less floor space. However product A may be a more profitable product but it takes more room. In retail this is often evaluated by looking at the gross margin per square foot of retail space.
To help provide more useful and accurate information that allows you to make the best business decisions, expansive reports can provide the information you need to evaluate the true profit and cost of your items. Profit-margin reports that can cross reference the gross margin with the actual dollars generated help avoid overlooking those low margin products that may actually generate a high dollar amount because of turnover.
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