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How To Do A Retail Business Health CheckBy David Brown, Edge Retail Academy |  April 12, 2017 (0 comments)

Omaha, NE—We all know that being overweight cause’s significant health problems such as high blood pressure and cholesterol which can lead to heart problems and impaired performance. Because all humans are different, doctors have height to weight ratio charts that tell your recommended weight according to your height. There are ‘tolerances’ on either side of your optimum weight, but go beyond those tolerances and you are considered either ‘obese’ or ‘underweight’, and at risk for potential health problems.

So, is it any different with a business? Just like humans, jewelry stores come in all shapes and sizes and the weight of your business (your inventory) should be relative to the height of your business (your sales). Too little inventory (underweight) will ultimately lead to a drop in sales just as too much inventory (obese) will lead to other business health issues.

David Brown of Edge Retail Academy

Your Stock to Sales Ratio (Obesity Test). One measurement of your business health is your store’s Stock to Sales Ratio (S2S). It is a simple calculation of your sales-to-inventory. For example, $1m of retail sales divided by $500,000 of inventory equals a S2S ratio of 1:2. ($1m/$500k = 2). What that means in practical terms is $1 of inventory produces $2 of sales.

To be accurate with your ‘Obesity Test’, you need to remove service/repair sales and custom work. So, let’s say your $1m store does $150,000 from services and custom work. That leaves $850,000 from showcase sales, so your S2S ratio would be calculated by dividing $850,000 by $500,000, which equals 1:1.7 ($1 of inventory = $1.7 in sales).

So, is that ‘healthy’ or not?  Well, if you think that ‘keystone’ and a one-time stock turn (it takes 12 months for inventory to sell) are acceptable, then a S2S of 1:2 is acceptable--but only acceptable. It is certainly not the peak of good health.

To illustrate this, we will use $100,000 of inventory as an example. See the "Business Heath Chart" below:

Business Health Chart	Vital Statistics	Vital Statistics
1.  Inventory	$100,000	$100,000
2. Stockturn	1	0.9
3. Cost of Sales (COGS) Fig.1 x Fig.2	$100,000	$90,000
4. Markup %	100%	90%
5. Gross Profit (GP) Fig.3 x Fig.4	$100,000	$80,000
6. Gross Sales Fig.3 plus Fig.5	$200,000	$170,000
7. Stock to Sales Ratio (S2S) Fig.6 over Fig.1	1:2	1:1.7

Note: There is some minor rounding in the 1.1:7 example above.

We believe that a S2S ratio of less than 1:2 means the store is ‘At Risk’. Some of the symptoms of an S2S ratio of 1:2 or less are typically:

1. Cash-flow problems
2. Minimal Net Profit for the owner’s wealth creation
3. A poor GROI (Gross Return on Investment)
4. High levels of Aged Inventory
5. Possibly having to Discount to sell aged inventory
6. Stress and burnout

Any of those sound familiar? See the S2S Chart below for a guideline on your business health: 

Business Health Chart	Obese	Acceptable	Healthy	Underweight
Stock to Sales Ratio (S2S)	Less than    1:2	1:2 to 1:2.5	1:2.5 to 1:3.5	Over 1:3.5
$1 of Inventory produces	Less than $2	$2 to $2.50	$2.50 to $3.50	Over $3.50

 

 

 

 

 

 

 

 

 

Important:  These are guidelines only and may vary depending on other market and regional factors.  As a matter of interest, the average U.S. jewelry store has a S2S ratio of 1:1.2 (only $1.20 of retail sales from every $1 of inventory).  In other words, very obese and at high risk of serious health problems!

Obese in practical terms, means you have too much inventory for your current sales.  Another way of looking at that is that you have too few sales for your current inventory!

Underweight means you have less inventory than you need to ‘sustain’ your current level of sales.  You will certainly struggle to achieve any sales growth.

A Healthy S2S ratio should allow for good returns and sustainable growth, however, the ratio may drop at times when you are planning for aggressive sales growth.

Action Steps:

1. Diagnose your own Stock to Sales ratio
2. If you are ‘At Risk’, diagnose specifically what is causing it. For example, is it a low stock-turn or a low margin (or a combination of both)
3. There are numerous ‘Prescribed’ and proven remedies depending on what needs to be fixed.  We can help you with these strategies!
4. Implement the remedies until your S2S returns to a healthy range.

If you would like The Edge Retail Academy to do a health check on your business, please reach out to us for a complimentary Business Opportunity Analysis. Email Becka Johnson Kibby, Becka@EdgeRetailAcademy.com or call (714) 925-2456.