PERSPECTIVES

From The Co-Founders

Tips, Tactics & Strategic Insights and Commentary
from The ROI Co-Founders, Pat Johnson and Dick Outcalt
Outcalt & Johnson: Retail Strategists LLC; Retail Turnaround Experts

But, we must take exception....

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2 MIN READ |
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by ROI Co-Founders |
April 24, 2023 |
General, Perspective |

We're sure you'll agree. Misinformation can be very harmful. Retailers surely don't need more harmful anythings!

Just last week, we came across the proverbial straw that broke the camel's back. It was a post on the Intuit Quickbooks site*, titled "Inventory Turnover Ratio." And the explanatory article was accompanied by an "Inventory Turnover Calculator."

What do we take exception to? The misleading and/or incorrect information it provides. For example, their "Inventory turnover calculator" requires two entries.

First, "enter the total costs involved in selling your products."

We must take exception. "Total costs involved in selling your products" is NOT the same as Cost of Goods Sold. Nor do they specify that it should be for a 12-month period of time.

The second entry they request: "Average inventory cost."

We must take exception. What they surely meant to say is inventory @cost.

Plus, they simply refer to "12 months of ending inventory balances," without specifying that it should be for the same 12 months for the previous entry.

Only the Beginning
Turns out, this is only the beginning of the misleading information.

Their accompanying article provides examples of the two different ways to calculate inventory turnover.

"Method One: Sales ÷ Your Average Inventory"

In their example, they use "$70,000 in sales, and your average inventory balance is around $4,000." They do the math, and calculate 17.5 turns.

"Method Two: Cost of Goods Sold ÷ Your Average Inventory"

This time, they use $23,000 for COGS, and still use $4,000 for "your average inventory balance." Therefore, after doing the math, they arrive at 5.75 turns.

Yikes! We must take exception!
Yes, there ARE two formulas for calculating turnover. One requires numbers @cost, the other requires numbers @retail. (see Glossary of Retail Terms on The ROI site) Mixing the two is garbage.

However, what the Intuit article recommends, dividing a cost number into a retail number, or a retail number into a cost number, will always generate garbage. And it is perilous.

How does Intuit explain the garbage results? "That's true; these methods will spit out different results. Both of these equations have their pros and cons." Sigh.

"What is a 'good' inventory turnover ratio?"
Indeed, when addressing whether there are benchmark numbers for inventory turnover, they correctly state that "It depends on the products you sell."

Then they go on to proclaim, "A large business that does millions of dollars in sales will naturally have a much higher number than a one-person operation."

Wait. What?? We MUST take exception.
The size of the operation has no bearing on calculating inventory turnover.

(By the way, Intuit: There ARE Benchmarks available. Go here on The ROI site to see Benchmark numbers for all retail verticals.)

That Fog of Confusion
Actually, we have long harbored concerns about the fog of confusion from Intuit and Quickbooks. Consider the P&L.

First, the top line on Intuit's Profit & Loss Statement is labeled "Income." Actually, what they MEAN to say is "Revenue."
Second, Quickbooks produces excruciating line item detail of expenses, in alphabetical order(!)

We get it. That works really well for the IRS, and for tax accountants. But it is of essentially no use as a business management tool.

And consider this: How many times year do you have to file taxes? And how many times each month or week do you have to make a management decision? That's what we thought. And that's why we take exception. (And why we built a Profit Finder tool to quickly sort and organize expenses into major "buckets.")

Not New Issues. But Much Wider Amplification
Granted, these are not new issues or concerns. There always have been sales pitches by software providers sharing not-quite-accurate retail financial information. Intuit is not alone in using explanatory articles to sell their accounting and POS programs.

But with the internet, the power of SEO to amplify misinformation (Google doesn't know or care about the correct formula for turnover) and now ChatGPT and other AI tools out there, the potential for retailers to be misinformed, malinformed, and/or misled has greatly expanded.

And the ramifications could be significant. Not to mention harmful.

We wish we could get a Surgeon General's warning to stamp out this kind of misinformation. Meanwhile, we must and will take exception.