Turnover
Turnover is that it is an extremely important factor in buying and
selling merchandise profitably. A good turnover rate is an indication of
good management since turnover is the result of intelligent buying based
on sound assortment planning and realistic estimating.
The word turnover means the number of times a given merchandise
investment is sold during a given period of time. Each time the investment
is sold it brings gross profit dollars to your business, out of which
expenses are paid and a net profit made.
As a simple example, let us suppose that you bought a unit of an item
at the beginning of a year for $1 and marked it to retail for $1.50; with
the sale of that unit, you got back its original $1 plus $.50 gross
profit. If your expenses allocated to that unit were $.45, the net profit
would be $.05. If the dollar is reinvested in a second unit, and it is
sold, your business has another $.50 to add to its gross profit and $.10
to net profit, plus the original $1 with which to buy the unit for the
third time. The third time it was sold, your business had accumulated
$1.50 in gross profit and $.15 in net profit. When the dollar was invested
again and sold, your business had accumulated $2 in gross profit and $.20
in net profit. Note, that this was done without ever investing more than
$1 at any one time. Thus, if a unit was bought and sold four times in one
year, we say that we had a turnover of 4.
Increasing competition for the customers’ dollars, and the rising
costs, squeeze profits. Improving turnover is one of the key ways you can
improve profit.
Although markup is an important element of profit, it does not
contribute to profit until merchandise is sold.
One of the weapons of the discount operations is very fast turnover
which enables them to get shorter Markups and still show substantial
dollar profits.
Example: If you were to invest $1,000 in items at a 8% Markup and it
turns 26 times in a year, and at the end of the year, you would have $2080
gross profit for your $1,000 investment. On the other hand, the same
$1,000 invested in items with a 40% Markup is turned 4 times and produces
only $1,600 gross profit on the $1,000 investment.
Any improvement in Markup is restricted by competitive pressure of your
competition, with low Markups and fast turnover. Payroll costs,
advertising and other expenses are on the increase and efforts to slow
this increase are often restricted by the same competitive pressure.
Therefore, one of the major elements in profit that is under direct
control of you is turnover.
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