Managing inventory at a pawn shop or a retail store is an essential component of doing business within this industry. Most importantly, when inventory is properly managed, better decisions can be made on pricing, manufacturing, marketing and the purchasing of new inventory. Inventory turnover is a ratio is a calculation that measures the efficiency of a shop’s inventory management. Understanding and utilizing the inventory turnover ratio gives businesses the opportunity to improve inventory optimization.
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What is Inventory Turnover?
Inventory turnover is a ratio that will show you how many times a company has sold and replaced inventory during a certain time period. More simply stated, it shows how frequently a company replenishes its inventory. For the most part, a higher inventory turnover implies strong sales.
More specifically, the ratio is calculated by taking sales and dividing it by the cost of inventory during a specific time period. For example, let’s say sales were $20,000 and inventory was $10,000 during the year. $20,000/$10,000 = 2. In this example, there would be two inventory turns during the year.
How Do You Know If You Have an Inventory Turnover Problem?
It is fairly common for a business to calculate its inventory turnover only then to realize that there is a glaring problem with the management of its inventory. Let’s take a look at some of the most common inventory turnover problems and exactly how they can be solved.
Types of Inventory Turnover Problems
Here are some of the most common types of inventory problems stores face:
1. Seasonality Problems
There are some items that have higher demands depending on the time of year. Chances are, you aren’t going to sell any snow blowers in the middle of summer.
Solution: Understanding the demand of items throughout the year is essential to the management of inventory. Use your previous data trends to track the demand patterns of your items. When it comes time to calculate your inventory turnover, you will know that your ratio can be affected by seasonal demand. The time of year when you crunch your numbers will influence how you analyze your inventory turnover ratio.
2. Slow Moving, High Cost Items
Those high cost items in your shop have the tendency to sit around for a long time until the right buyer finally comes through the door. Items that sit around like this means that your working capital is committed to these items, often negatively affecting your inventory turnover ratio.
Solution: Every retailer is set up differently; however, if it is possible to rush order these high cost items when needed, then you can avoid the liability of holding on to them for long periods of time. You also avoid the risk of having a high cost item become obsolete. An obsolete item that sits on your shelf can translate into a total loss and a big hit against your inventory costs.
3. Over-Ordering in Bulk
Excess inventory can cause some major problems. This issue often occurs when businesses buy too many items in bulk. Over time, this can cause your inventory turnover ratio to become too low. In other words, all of your capital is tied up in inventory, and it could take a long time to regain the proper profits to keep your shop afloat.
Solution: The idea here is to lower your carrying costs as much as possible. Avoid buying in bulk just to receive a discount. While those discounts can be enticing, they can lead you to trouble in the form of overstocking. Keep a close eye on your inventory turnover ratio and keep your inventory levels lean throughout the year.
4. Inaccurate or Missing Inventory Data
Everything that we are talking about in this article revolves around inventory data. If your inventory numbers are often inaccurate or even completely missing at times, then you will not be able to properly assess your inventory situation.
Solution: Invest in inventory management software. We do not recommend tracking inventory on pen and paper. Utilize today’s technology with software that tracks and backs up your data to ensure that you have the correct figures needed to calculate an accurate inventory turnover ratio.
5. Dead stock
We touched on this a little bit earlier, but it’s worth diving into a bit further. Dead stock are the items that have become completely obsolete. There are a number of reasons this can happen. They may go out of style, out of season, or somehow become completely irrelevant. If an item has been on the shelf for 12 or more months, it is usually declared dead.
Solution: Don’t get too caught up in temporary trends. Just because an item is hot now, it doesn’t mean it will be hot forever. Don’t make the mistake of buying too many of these items in the event that their popularity eventually dissipates. It also helps to look at sales reports on particular items before you buy them so that you can get a feel for how they will perform.
It’s vital for every pawn shop to keep inventory management at the forefront of operations. Utilizing inventory turnover is a great tool to make sure that you stay on the right track with your goals. If any of the above-mentioned problems sound familiar, take some time to address them by implementing one of the solutions that we described. By doing so, you are creating a better inventory management plan that will get your pawn shop in a steady financial position that can lead to improved bottom line profits.
