As a retailer, it’s important to understand how much profit you’re earning on your inventory. To do that, you need inventory management apps, QuickBooks Online accounting software, and some basic knowledge about the best metrics to use.
Why Is Your Inventory Count So Important?
It’s important to count inventory correctly, because this figure is used in one of your business’s most important calculations – your Cost of Goods Sold (COGS). For this calculation, you start with your amount of inventory at the beginning of the period for which you’re running the report. You then add your inventory purchases over that period and subtract your remaining inventory. If any of these numbers are off in the slightest, your COGS figure is also incorrect. Without a proper COGS amount, your business expenses are inaccurate. You can see how this one factor could critically damage your entire reporting process. With accurate numbers, you can identify any operational issues in your company ahead of time.
Inventory Management Apps
There’s a whole slew of inventory tracking tools that seamlessly sync with QuickBooks Online. SOS Inventory and Asset and Inventory Tracker by Ventipix track, manage, and organize your inventory while also offering features that save time, such as automatically generated purchase orders based on current inventory levels. These apps can also track the money you collect in sales and any money you give back through refunds. But, you need more than just raw data to assess your inventory’s profitability. Ideally, you need to sync these apps with QuickBooks Online so you can generate reports that assess key metrics related your inventory’s overall profitability, as well as the profitability of individual items.
Inventory Profitability in QuickBooks
To assess the profitability of your inventory with QuickBooks, generate a Profit and Loss Report. This report shows your business income and expenses, and between these two areas, you can see your COGS figure and a gross profit inventory line. Gross profits are the difference between your total income and COGS, and this is the amount of profit you’ve earned from your inventory. If you don’t see a gross profit line, change the accounting method from cash to accrual and run the report again. You can then break profits down by individual items, which gives you the ability to assess which items are most profitable for your company and which items might need to be discontinued.
Calculating Your Inventory Turnover Rate
In addition to looking at your inventory profits, you can also assess your inventory turnover rate. This measures how quickly your inventory sells and helps you assess where you need to make changes. If your turnover rate is low, you may want to reduce the amount of inventory in storage to save money. If your rate is high, it’s a good indication you probably occasionally run out of certain items in your inventory. Knowing this, you can explore methods for keeping higher levels of those products on hand. When you calculate inventory turnover for specific items, it helps you assess which items sell quickly. From that data, you may decide that you want to focus on selling more or less of certain items.
To find your turnover rate, take a look at these inventory metrics examples:
Divide COGS by the average value of your inventory over a certain period. You can calculate your average value of inventory by running an inventory valuation report on QuickBooks.
For example, if your COGS is $20,000 and the average value of your inventory over the same time period is $30,000, your turnover rate is $20,000 / $30,000 or 0.67. This means you turned over two-thirds of your inventory during the month. In other words, you sold and replaced two-thirds of your stock. Different industries aim for different turnover rates, so you can make better decisions by researching average turnover rates for your industry.
Another way to calculate inventory turnover is by dividing the cost of goods sold by the average inventory. The average inventory is the beginning inventory plus the ending inventory, divided by 2.
Assume that the month’s beginning inventory was $1 million and the ending inventory was $1.5 million. The cost of goods sold over the month was $800,000. The inventory turnover is:
$800,000 / (($1 million + $1.5 million) / 2) = $800,000 / $1.25 million = 0.64
Generally, for inventory turnover, a higher ratio is better than a lower ratio.
Knowing your company’s inventory turnover rate can help you manage your company’s resources. It helps you avoid buying too many raw materials or products, and it helps you avoid selling out of your most popular items. Analyzing your inventory turnover rate helps you manage your total inventory efficiently. You can compare current figures to historical numbers and the fluctuation in the industry to determine if you’re meeting your objectives. Your inventory turnover rate can also be compared to your sales projections. This calculation has so many important functions, and without it, you’re running blind.
Analyze Your Turnover Rate at Regular Intervals
Monitoring your inventory on a regular basis helps you maintain Goldilocks levels – just right. Preparing a monthly analysis of your inventory level should suffice. Holding too little inventory means you could miss out on future sales, especially in today’s on-demand world where your customers turn to a competitor. However, if you stocked too much inventory, you’re effectively tying up company capital, running the risk that those goods might go stale or become obsolete.
One way to check how often you need to replenish your inventory is to calculate your inventory turnover ratio. This is simply your cost of goods sold, which is obtained from your income statement, divided by average inventory, or the starting inventory plus ending inventory divided by two.
Software such as QuickBooks can make tracking inventory and calculating your turnover ratio easier. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.