There are two ways to make a small fortune in retailing. The right way and the wrong way. The wrong way is to start with a large fortune and see it dwindle down to a small fortune through improper merchandising choices.
Now since most of us don’t have the luxury of starting with a large fortune, we have to take our precious capital and make sure it works as hard as possible to make us rich.
There’s only one way to do that and it’s with turnover. You probably know of turnover, but do you really know how it can turn your store into a money machine? If you’re tired of chasing money to pay the bills (merchandise invoices and overhead) and you’d like to see profits on a regular basis rather than deficits, then turnover needs to be incorporated into your merchandising.
It’s great to order fantastic merchandise, but that’s not enough to insure your success. Buying the right items will bring in the customers, but buying the right quantities brings in the profits. Buy too little and you miss sales. Buy too much and you’re faced with markdowns.
So, how do you know how much to buy? The answer is in your open to buy plan which is driven by turnover. Here’s a little example of how turnover will make a big difference.
Let’s say when you open your store, you have capital of $50,000 and research the wholesale market and spend your $50,000 on merchandise that you know will delight your potential customers. So, now you have $100,000 of retail dollar inventory to work with. If you sell all of that merchandise during the year, you will have generated $100,000 in sales. $50,000 will go to your vendors to pay for the merchandise, $40,000 will go to pay your overhead (rent, staff, advertising, utilities, etc.) and you will be left with a $10,000 profit. Not bad if there are no markdowns.
Now if you can turn your inventory faster, say a two time turn rather than the one time above, you will generate $200,000 in sales (from the same invested capital), contribute twice as much to overhead and profits. $100,000 to your suppliers for the merchandise, $80,000 to defray overhead and $20,000 to profits. That sounds better already.
So, turnover enables you to create more money for overhead and profits from the same initial investment. If you can turn your inventory four times you’ll create a larger contribution to overhead ($160,000) and profits ($40,000). And there are other built in benefits. By turning faster, your inventory comes in and goes out faster, keeping it fresher, more exciting, and producing far fewer markdowns. And while the examples above sound pretty enticing, when you start adding in markdowns, you start eliminating profits (first) and then the contribution to overhead.
Turnover is the key to retail success. The more you turn, the more you make. How to plan and control turnover will be the next post, so stay tuned.