As a retailer, it’s important to understand how much profit you are 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.
Inventory Management Apps
There are a wide range of inventory management apps that sync with QuickBooks Online. SOS Inventory and the Asset and Inventory Tracker by Ventipix, for example, track and organize your inventory, while also offering features to help save time such as automatically generated purchase orders based on current inventory level.Additionally, these apps can track money you have collected in sales and given back through refunds. However, you need more than just this raw data to assess the profitability of your inventory. Ideally, you need to sync these apps with QuickBooks Online so you can generate reports that allow you to assess key metrics related to the profitability of your inventory overall as well as the profitability of individual items.
Inventory Profitability in QuickBooks
To assess the profitability of your inventory with QuickBooks, you need to generate a Profit and Loss Report. This report shows your business income and expenses, and between these two areas, you should see the cost of goods sold (COGS) and a gross profit line. Gross profits are the difference between your total income and COGS, and this is the amount of profit you have earned on your inventory. If you don’t see a gross profit line, change the accounting method from cash to accrual and run the report again. Break profits down by individual items so you can assess which items are the most profitable for your company.
Inventory Turnover Rate
In addition to looking at the profits you are earning from your inventory, you also have to assess your inventory turnover rate. This measures how quickly your inventory sells and helps you assess where you need to make changes. For example, if your turnover rate is low, you may want to reduce the amount of inventory in storage to save money. Conversely, if your rate is high, you may occasionally run out of inventory and may want to explore methods for keeping more inventory on hand. When you calculate inventory turnover for specific items, it can help you assess which items sell quickly. From that data, you may decide that you want to focus on selling more or less of a particular items. To find your turnover rate, divide COGS by the average value of your inventory over a certain point. To find the average value of your inventory, you need to run 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, and you should research the averages for your industry.