How’s Your Inventory Turning?

The concept of understanding the importance of inventory turns is not new, but it is an often overlooked practice in many RV/Marine/Auto dealerships. When we have a good understanding of inventory turns, it helps us to plan, organize, predict, and evaluate how our business is doing. Demonstrating this reality is our solar system. The Earth turns once approximately every 24 hours; we call it a day. The Earth turns approximately 30 times and circles the moon once; we call this a month. The Earth turns 365 times and circles the sun once; we call this a year. We use this knowledge to create calendars by which we can plan, organize, and control our lives all based on turns.

Understanding RV/Marine/Auto turns is very important to dealers also. I can’t tell you how many times I have asked a General Manager or General Sales Manager to tell me how many times their inventory is turning per year just to hear them respond by saying, “I really don’t know.” This incredible response tells me that a little training is in order. In this issue we will discuss how to determine your turn ratio and the value of understanding the turn ratio.

Finding Your Turn Ratio

Let’s begin with the basics and do this the simple way. Determining your turn ratio for any given year requires two key pieces of data: the yearly cost of goods sold (vehicles) and your average inventory on hand. You then take these two figures and divide your cost of goods sold by your inventory number. For example, Big Ticket RV in Texas sold 10 million in RVs in the year ending December 31, 2012. The cost of the RVs Big Ticket sold was 8.1 million. The amount of inventory on hand at December 31, 2012 was 3.5 million (we will assume that Big Ticket’s inventory was also 3.5 million at the beginning of the year; he therefore maintains a consistent 3.5 million yearly average inventory). Now let’s determine Big Ticket’s turn ratio.

Cost of Goods Sold/ Avg. Inventory = Turn Ratio

$8,100,000/$3,500,000 = 2.3 times per year Now we need to get to second base