"Productivity": Inventory Turnover
Inventory turnover is essential to all retailers, from the newest start-up to Fortune 500 chains. It measures how often, at your present rate of sales, your entire inventory is completely sold and replaced during a given period.
There are two formuals to calculate turns; one uses inventory at cost, the other uses inventory at retail.
Sales @retail divided by Average Inventory @Retail;
Cost of Goods Sold divided by Average Inventory @Cost
COGS ÷ Average Inventory @Cost = Inventory Turnover
$635,000 ÷ $292,500 = 2.2
Theoretically, this means inventory is “sold out” and “replaced” 2.2 times per year. To convert inventory turnover into days, take 365 days and divide by the turnover rate. In the above example, 365 is divided by 2.2. The result is 166 days, which means at any given moment in time, 166 days (or five and a half months) of inventory (e.g., "one turn's worth" of inventory) is the maximum amount of inventory to have on hand.
"Profitability": Profit Before Taxes Percentage
Profit before taxes percentage measures your profitability after sales and all deductible expenses are recognized. It indicates the percentage of original sales dollars remaining as profit, and taxed as such.
The formula is Profit before Taxes divided by Sales.
Profit Before Taxes ÷ Sales = Profit Before Taxes Percent
$10,000 ÷ $1,000,000 = 1%
Using this example, of every $1 in sales, only 1% (1 cent) remains as profit before taxes. (Note: profit before taxes measures your operating efficiency, as opposed to gross margin percentage which measures your sales efficiency.)
The Best Part: Compare Your Ratios to Other Stores Like Yours
Once you have these four key ratios, you can readily compare your financial situation to other retail operations like yours. Simply go to your retail segment here at The Retail Owners Institute. See the most recent benchmark numbers for your store type. Even better, spend some time with the charts showing the 5-year trends for your industry.
Use Benchmark Numbers
Go to your retail segment here at The Institute. Spend time with the 5-year trends charts for your industry. How do you compare?
By comparing your ratios with industry standards, you can note whether your ratios are more or less favorable than other businesses within the industry. Higher is not always better. For instance, a higher debt-to-worth means more debt—which is not necessarily more desirable.
Keep in mind that no one ratio, even compared to industry averages, tells as much about your operation as the trend of your ratios. For example, has your current ratio dropped (liquidity lessening) over the last year? If so, what will it be in another six months? What action(s) must you take to prevent a slip from continuing?
You may find it helpful to write down your reasoning. By facing the facts now, you’ll be better prepared for those unexpected ups and downs.