Having too much stock on the shelves means stock is going unsold, and your working capital is tied up in the unsold stock. Free up your capital by measuring the efficiency of your inventory by calculating the inventory to sales ratio.
Ideally you want to keep the inventory to sales ratio low. If it starts to rise, it’s telling you that your sales are falling or that you’re ordering and maintaining too much stock compared to sales.
To calculate the inventory to sales ratio, pull your gross sales numbers from a period, then remove returns, damaged stock and sales discounts, giving you your net sales.
Now just divide this number by your end-of-period inventory. This is your inventory to sales ratio.
Inventory to sales ratio is a handy measure to understand how much stock you can have on hand to fulfil demand in your store without having to take too many customer orders. It might be more efficient to run this number very low, but you’ll be sacrificing some of the ‘cash and carry’ customers who just want a paticular product and need it right now.
Play around with your inventory to sales ratio. Run it lower for a period and see the effect this has on customers and profitability. Then run it higher for a period. You’ll soon find out which is the best way to run your inventory to sales ratio for your retail store.