Reserves:  How Empty Is Your Tank? click here

Do You Have the Right Stuff? Use GMROI to Find Out  
Success in business should be so simple, really. Generally, you have to buy the right quantity of stuff at the best price, with good markups, and sell this "right stuff" to customers within reasonable time frames. What's so hard about that? Well, for one thing, what makes the right stuff right? And what makes a markup good? 

As usual, when you look only at size – whether you're talking sales, margins, or inventory levels - you can come up with a less than satisfying result. What you really want to be looking at are your numbers in relation to each other to get your true picture. 

These relative numbers, also called ratios, are important because they create benchmarks to both compare and measure your performance - regardless of sales size. One of the key benchmarks we use is GMROI, also known as Gross Margin Return on Inventory. GMROI helps people decide which of the "right stuff" they should be selling. 

For example, one jeweler we know prided himself on his large selection and sales of watches. That was, however, until he realized that his watch department's overall GMROI was significantly lower than some of his other, less well-stocked (and less well-promoted) departments. As he put it, "I have been in denial for over 13 years regarding the affect a slow turn and low margin has on my business. Until you see the indisputable graphic analysis, you can stay in this euphoric state forever."

Whether you call it euphoria or denial (like our jeweler friend) the first step is admitting you have a problem! Second, you need to do some simple calculations. Here's how you calculate your overall GMROI:

1. Calculate your gross margin, which is sales minus cost of goods sold.
2. Calculate the value of your inventory at cost.
3. Divide your gross margin dollars by your total inventory.

For example, if your total gross margin is $1,400,000 and your inventory is $900,000, your GMROI is 1.55. In other words, this means that for every dollar you have invested in inventory, you are getting back $1.55 to pay expenses and make a profit. Besides the fact that it helps you measure return on your biggest investment, it's handy for several reasons:

We're not saying size doesn't count. Of course it does. But manage your GMROI results and you'll enable your inventory to work for you and generate increased profits at whatever your sales level. 

Reserves:  How Empty Is Your Tank?

Wendy, a retailer, was talking about how her business had fared during the recent series of hurricanes.

“I’m so glad I have a good relationship with my bank.  I had to call him and increase our credit line to get some cash to hold us over.  And thank goodness we’ve got good insurance as it will help cover the lost business from being closed for 7 days.”

Although she’d had more than her share of bad luck, it seems her “good luck” with her banker and insurance company was coming through.  Her business was going to weather the storm, literally and figuratively, ok. Or was it luck? I call it having a reserve. 

Reserve is a margin, the gas in the tank or the cushion in the account. In Wendy’s case, it was the credit line that had already been set up with the bank, before she needed it.  It was the cash management process she used so that she wasn’t already maxed out on the line when the storms hit. 

Although we usually think of reserves in terms of money, it can exist in many other areas, including your relationships.  In Wendy’s case, it was the time she took to meet with her banker on a regular basis throughout the year to educate him about her business, share updated financials with him, and review her business plans.  Through these steps, she had created a reserve of trust, information, and shared experiences, so if/when the time came, he had what he needed to go to bat for her.

She’d been careful to review her insurance policy every year with her broker, carefully going through all the “what if” worst case scenarios to ensure that she’d have enough coverage.

There are ten areas of reserve: time, space, money, energy, opportunity, love, information, wisdom, self, and integrity.

Time is an interesting one.  I was always one to schedule just enough time to arrive at my appointments right to the minute. Since my time was too valuable to waste, I never bothered to build in downtime to arrive even a few minutes early.  Consequently, any circumstance – traffic, stop lights, elevators - tended to make me late. I was convinced that none of these circumstances were my fault.

Then one day I read an interesting quote.  “Being late is like saying F-you to the other person.”  Wow. Kind of harsh but kind of true. All these things that were supposedly out of my control existed because I habitually failed to build in any reserve time. Now, I leave in enough time for the inevitable to happen.  I also bring work with me in case I arrive early.  It’s kind of nice to have some time to sit and think.  And it’s definitely created less stress from all the things that can happen along the way.

Energy is a huge area.  How would your life be different if you actually had a reserve of energy?  The number of hours in a day is fixed, but the quantity and quality of energy available to us is not.  That’s the premise of the book, The Power of Full Engagement, by Jim Loehr and Tony Schwartz.  (It’s also available in CD format, so you can listen to it in your car “reserve time.”) It’s a great read (or listen) with lots of case studies and solid examples of how you can build rituals in your life to build energy reserves.

To have reserve is to be freed from the demands of circumstance or crisis.

Ask yourself: "What are my reserves of time, space, money, energy, opportunity, love, information, wisdom, self, and integrity?" And, “How would my life be different if I had reserves in all of these areas?”