How Can I find out how much Inventory I need to reach a particular revenue goal?

[unitario1991]

Hi everyone, I'm new to Square. I was wondering if any experienced retail owners could help me understand how to determine how much inventory I need to have to reach a certain profit.

I'm in the grocery/convenience store industry and I've finished putting in my unit costs and prices for all my products, so now I have a report from Square that shows my current inventory value, retail value, and projected profit. My question is: How do I determine how much more inventory I need to buy in order to improve my profit so I can work towards obtaining that during the year? 

[Candlestore]

You would have to calculate your Margins per Item.  The number of Items You sell.  Hope they all have the same margin.  So Basically there is no magical formula to tell you you need inventory of 50 widgets, 20 Doo-ma-jiggies, 15 Wha-whoz-its to get this much profit for this time frame.  Each item could have different profit returns.  Especially with this current economy.  Since your in grocery, convivence store are people buying Necessities only or are they adding other items to their purchase also.   If you could figure out a way to do this you could retire because that would stop overbuying on items if they could figure out which items would sell and which ones would not.

The best thing to do is look at your own historical records and try to make a best guess on how much inventory you need of the better selling items.  How long it took items to sell, which ones sell out faster than others etc.

Good Luck

[unitario1991]

Thanks, that helps a lot. 

[Candlestore]

You're welcome

[PartyManiaMD]

Generally speaking a few things to keep in mind in addition to what Keith said:

1. How often do you receive shipments?

2. How long does it take after an order is placed until it gets put on the shelf?

3. How often are you turning over a product?

I have items that I order that will sit for up to 2 years without moving, that doesn't mean I get rid of them from my item mix, it just means I only reorder once every 2 years. The reason it takes so long to move certain products is that one holiday I might sell 0, the next I might sell out completely. Especially for seasonal items it's a hit or miss and completely up to the whims of my customer base.  I also have products that sell incredibly well so I order once a week on Monday and get my shipment by Friday. I keep two weeks worth of those products in case they're backordered.

4. Can you afford the carrying costs for backstock? if your shelf only holds 12 of an item and you have 12 in the back that's 24 units at a time, if you run through 36 between shipments that means you need 24 in the back and 12 on the shelf at least.

Retail is hard because cogs are so high but depending on your margins and how busy you are then it's also kind of fun. I pretty much plow everything I sell back in to inventory because it lets me see incremental growth. If I take $1,000 worth of product and flip it to $2,000,$2,500 or $3,000 (a 2x, 2.5x or 3x markup) I then flip that $2k into $2k worth of products.

Keep in mind most of my products are shelf stable and have extremely long shelf lives unless they're candy, so I can be a bit more bullish on my overstocking.

I actually left retail and went into hospitality for close to a decade and man did my philosophies on ordering get me in trouble with corporate. We'd run out of Tito's or other critical liquors so I'd over-order to compensate, I wouldn't run out but they were always yelling at me for placing larger orders instead of incremental.

My competitors hand me their market share because the large chains keep such tight inventory controls and while I get why they do it to me it's better to have full shelves than to potentially lose a customer because of an empty shelf.

Best of luck, the analytics Square offers are useful and hopefully you can find that sweet spot of enough inventory but not too much or too little!

[unitario1991]

Thanks for the input! I'll definitely keep this in mind as well. 

[Bronze_Palms]

All these answers are really great- 

I wanted to add that is starts with your bottom line AKA your fixed costs. Rent + utilities + paying yourself.

Then, what is your margin on goods.

Divide that number into your goal for the year.

You likely have seasons or months that are busier than others so setting different goals against months are great to do too.