A Metric to manage inventory & sales growth
Inventory management, or stock management in a business is critical to both the cash flow and sales growth. Too little stock has the issue of effecting sales, and too much stock has the issue of negatively effecting cash flow. It is a fine balance of the stock levels that meet the twin criteria of cash flow and sales growth.
Larger businesses invest in sophisticated systems to manage this balance. They have invested in sophisticated ordering processes and reporting. In all businesses though it is useful to keep an eye on a measure that can give an insight to this balance. This measure is inventory compared with sales.
We measure this by: -
Sales ÷ Average Inventory
We can look at this on a monthly, quarterly or annual basis. This shows how much inventory we have as a percentage of sales.
The important issue with this metric is to measure it on a trend-line. A one off snapshot does not give a lot of an insight into the management of inventory. The trend of this metric though can give an insight as to whether our inventory policies are better managing or are negatively managing our stock levels.
It is not the metric that’s going to provide all insights into the business, but it is a useful measure, particularly looking at it from the trend-line.
Closely related to this is the average inventory turnover. This is having a look at how many times the inventory turns over in a year. The greater the turnover the better, because it is the velocity of the inventory through a business that determines both the sales and cash flow growth.
These measures can provide a useful insight into the management of an important area of the business, being inventory.
Photo: Molajen
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