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3. Have enough inventory to create a pleasant appearance in your store (the illusion, if not the reality, of bountiful stock)
You know better than anyone how to make your displays look attractive. But remember, don’t order so thin on something that it looks skimpy. After all, you want your
customers to think of your store as their resource for all things spiritual. If the shelves are too bare it will create the opposite impression.

Inventory = investment
If you don’t remember anything else, remember this: When you place an order, you are doing much more than just buying. You are investing your limited resources in your inventory, and you always need to be mindful of what kind of profit you are going to make. If you don’t sell those items quickly, you’re not maximizing your investment, and you can’t afford to do that in this economy. So when you make your purchases, you must prioritize. It helps to follow the basic rules of investing:

Have a budget
Figure out how much you can spend, what areas of your store to expand, and where to cut back. When considering a new line, you run the risk that it may not sell or you might have to spend money building a new display. Is the potential return worth the risk? Is the margin unusually high? You always need to stick to your plan and buy within your budget—don’t make any purchases without weighing the possible results first.

Have a plan
So how do you plan what to buy? Here’s where your sales history enters into the analysis. As an investor, you need to measure the return you get on your investments to determine which investments are doing well. This shows you what you might need to sell off in order to put the money into something that is performing better. This measurement is your return on investment, or ROI. It basically tells you what you are getting back for what you have invested in your inventory—it’s your profit.

Calculating GMROI
As an example, let’s say you found a line of beautiful, handpainted vases that you believe you can sell for $30 each. Since they’re only costing you $10 each, you’re marking them up three times. The minimum order is 50 units at $10 each, or $500. The vases come in five different designs, so you get 10 of each.

To calcuate the GMROI for the vases, follow the formula for GMROI:
Gross margin percent × sales ÷ average inventory. The formula for the gross margin percent is 1 – (1 ÷ markup), so the vase gross margin percent is 1 – (1 ÷ 3) = 67%. The formula for the average inventory is (beginning inventory + ending inventory) ÷ 2. Beginning inventory is the cost of the order, or of the item ordered if comparing for single items. Ending inventory will be the beginning inventory minus what you paid for what was sold during the month or cost of goods sold (COGS). This assumes no more inventory was received during the month. (For example, if you order 10 units and your anticipated sales are 5, you will have 5 units at the end of the month. Your ending inventory would be 5 × unit cost.) Assuming you expect to sell 20 vases per month, your beginning inventory was $500, and your ending inventory is $300 ($500 – (20 × $10) ), the vases’ average inventory is ($500 + $300) ÷ 2 = $400.

The GMROI for the vases is 67% × $600 ÷ $400 = 1.005. To plan your purchasing, you need to know how much different sections of your store, and different product lines, are contributing to your profit. This is the “gross margin return on investment,” or GMROI. It’s the ratio of what you make—your gross profit—to what you have invested in inventory for a period of time (usually one month).

To use GMROI in your investment plan, compute the GMROI for each section in your store. You can use the downloadable spreadsheet for this (www.newleaf-dist.com/icforretailers.asp), or your
own computer system. The important thing to remember is you can compare the GMROI for a product line or a section to other lines or sections to see how much money they’re making. The higher the GMROI, the more they are contributing to your profit. Computing GMROI quarterly, or even monthly, is ideal, because it will show you trends. Then rank your sections in descending order of GMROI. Using your budget, allocate your purchasing dollars toward the sections that give you the highest return.

But don’t forget your soft factors—knowing your customers, knowing your trends, and following your intuition. It would be a mistake to get so into numbers that you sacrifice the art of selling.

Balance risks vs. rewards
Should you invest in a new line? To find out, project the GMROI based on estimated sales projections and how much inventory investment is required. Now look at the risks: Are the books or products returnable? Will they require any special handling, which will increase labor costs? Will they require construction of a special display? What might go wrong? Compare the risks to the rewards: Is the GMROI high? Will you have strong sales and large margins? Will the books or products add to your store’s variety? Will they perhaps draw new customers?

Maintain discipline
Be sure to make a commitment to yourself, tell others what you are doing and ask them to remind you of your commitment, and use the COVR newsgroup to compare GMROIs with others. If we weren’t all into transcending our egos, you could impress your colleagues with how on top of things you are!

Get the most for your money
As a small, independent retailer, you have little leverage to negotiate deals with your suppliers, so your options for improving your margins are limited. Most of your suppliers probably have a price schedule or discount schedule; the more you buy, the better your deal. You would think that better margins mean more profit, but is that really true? Is it ever more profitable to buy “thin” at a lower margin, and thus turn the inventory faster, than to buy larger quantities at a higher margin?

The answer is yes. In almost all cases, ordering small quantities and moving inventory faster, even though the profit margin may be much less, is more profitable than buying at greater margins but holding the inventory longer.

This is called “just in time” inventory, which means having the precise quantity of items on hand so that you don’t run out without tying up any more money than is absolutely necessary. It’s what the “big boys” do, and you can play the same game.

To make these calculations really useful, use the formulas for day-to-day ordering decisions. This same GMROI formula can be used to compare ordering an entire line or individual items—you can use it to compare ordering five units at a 45% discount to two units at a 40% discount, or to compare ordering 100 units directly from a publisher at a 50% discount with ordering 80 units from a wholesaler at a 40% discount.

Other factors

Inventory turnover
Another key statistic to help you control your inventory is inventory turnover or inventory turn—the number of times yourinventory sells in a period of time (usually one year). You can calculate the turn by dividing the cost of goods sold for a particular sales period by the average inventory.

Example: Let’s look at hypothetical book sales for one year.
Let’s say you have $300,000 of books purchased at an average discount of 40%. Your cost of goods sold (COGS) was 0.6 x $300,000, or $180,000. If your average inventory for the year was $100,000, then your inventory on books turned over 1.8 times.

Lead time
You’ll also want to take into account lead time—the time that elapses from when you place an order to when it is received and available on your shelves. The longer it takes to replenish the items, the more inventory you need to avoid being out of stock. Any lead time that is longer than a week greatly reduces GMROI—or if you run out, greatly reduces sales.

Sales in period
We all know that unit sales for various inventory items can fluctuate dramatically; however, since sales should be the same no matter what your margin is, you only need to get close for the purpose of comparing ordering options. In fact, if you have a general idea of how many you sell a month, that’s close enough. Your computer system probably can generate a report that will show unit sales per month for various inventory types. Basically, you need to calculate your average unit sales per month for various inventory types in your store. Once you have your average unit cost, calculate the historical average unit sales per month by dividing monthly COGS for the inventory type by average unit cost.

Always remember that you are an investor, and you have to maximize your investment at all times. Keeping a finger on the pulse of your store, from the intuitive (knowing your customers) to the analytical (crunching the numbers to maximize your profit), will help you survive—and thrive—in this economy.

Alim Thompson is the president and CEO of New Leaf Distributing Company (www.newleaf-dist.com) in Lithia Springs, Ga. This article was adapted from his presentation at INATS West (www.inats.com) in Denver in 2008.