Inventory Turnover

When you have replaced 100 percent of your original inventory, you have "turned over" your inventory. If you have, on the average, a 12-week supply of inventory and turn it over four times a year, the count cycle plus the order cycle plus the delivery cycle add up to your needs period. Expressed as an equation, it would read:

Count Cycle + Order Cycle + Delivery Cycle = Needs Period

For instance, suppose you decided to count inventory once every four weeks (the count cycle). Processing paperwork and placing orders with your vendors take two weeks (the order cycle). The order takes six weeks to get to you (delivery cycle). Therefore, you need 12 weeks' worth of inventory from the first day of the count cycle to stay in operation until your merchandise arrives.

You can improve your inventory turnover, however, if you count inventory more often--every two weeks instead of every four--and work with your suppliers to improve delivery efficiency. Alternate ways of distributing goods to the store could cut the delivery cycle down to three weeks, which would cut inventory needs to six weeks. As a result, inventory turnover could increase from four times a year to eight times.

Another way to look at turnover is by measuring sales per square foot. Taking the average retail value of inventory and dividing it by the number of square feet devoted to a particular product will give you your average sales per square foot.

You should know how many sales per square foot per year you need to survive. Calculate your sales per square foot once a month to make sure they are in line with your expectations.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press