Hidden Costs of Inventory
You finally dusted off and sold that fine piece
of giftware you fell in love with at the buying
show four years ago. Since you sold it at full
price, you made a pretty nice profit, too. Or
did you? Probably not, if you factor in all that
you spent the last couple of years in carrying
that particular piece of inventory.
try not to throw too many statistics at our
workshop attendees, but one of the key factoids
we always share with people is the average cost
of carrying inventory. Inventory experts
calculate that it starts at 20% of your total
inventory dollar and can go as high at 55%
depending on your industry. These costs are
known as "hidden costs" because
typically you won’t see them listed as a
separate line item on your P&L.
because they’re hidden, though, doesn’t mean
that they don’t erode your bottom line! These
hidden costs include:
of handling and moving inventory within your
warehouse, shop and/or showroom. How much of
your employees' time is spent in these
and utilities for the portion of your warehouse,
shop and/or showcases. 2-5%
and taxes on inventory. If it's on your
property, you have to insure it. Depending upon
your location, it may also be subject to tax.
inventory. The more material in your warehouse
or shop, the longer it takes to count. 2-5%
shrinkage and obsolescence. The more stuff you
carry, the higher the possibility of shrinkage
and obsolescence. 3-6%
biggest cost is the opportunity cost of the
money invested in inventory. How much could you
make if you were to take the money you're
investing in inventory and invest it in a more
traditional investment? Or, if you are financing
your inventory, how much interest are you
currently paying the bank? Most importantly, how
much are you losing by not having the cash to
buy more productive inventory? 6-12%.
you more visual types, picture your company’s
cash flow as akin to your body’s blood. You
need good circulation to keep it healthy and
flowing. Excess inventory is like plaque buildup
on artery walls. You can survive with some, but
it gradually slows everything down. Eventually,
it puts a stop to the flow completely. In a
business, excess inventory gradually siphons off
profits in the short term, and in the long term,
kills it by cutting off cash flow.
your inventory as dollar bills that turn to dust
after one year (or less depending on your
industry). You wouldn’t keep a bunch of those
dollars just sitting around, would you?
out what your inventory turns are now and what
they should be, by comparing yourself to
a dollar to the problem to make it more real.
Figure out "how much too much"
inventory you’re carrying and multiply it by
the hidden cost factor of 20%.
an inventory aging report on a regular basis.
Too old? Mark it down or melt it down.
better in the future by looking at your
inventory by department and tracking: sales,
gross margin and turns.
your price points that sell and buy (or
re-price) into those.
to know more? Join us at a 2006 BRS Profit
Mastery Workshop. Jewelers are here
all others visit here.