In this article, You Will Learn:
- The importance of the stock to sales ratio
- Identifying the right stock to sales ratio for your store
- The impact of timing on stock to sales
Keeping the right amount of inventory on hand is one of the biggest challenges for a retailer. You want to have enough merchandise available to meet customer demand, but you don’t want to invest so much in inventory that you overly restrict cash flow.
The stock to sales ratio is a way to determine the relationship between how much stock you have and how much you’re selling. For example, if your stock to sales ratio is 5:1, you’ve got $100 worth of inventory for every $20 worth of merchandise you sell.
Ideally, you’d like this ratio to be as low as possible. However, you can’t have your ratio be too low: nothing kills a store faster than appearing empty. It’s the kiss of death when a customer says, “Oh, them? They never have anything.”
What Happens When The Stock to Sales Ratio is Too High?
Let’s look at that initial example, where there’s a 5:1 stock to sales ratio. What’s wrong with that picture?
It’s simple. Tie up that much money in inventory, and you’re not going to have enough money to do anything else! It’s essential to have adequate cash flow to take care of all those ‘extras’ — things like rent, payroll, insurance, utilities…you get the picture.
So What’s the Ideal Number?
The ideal stock to sales ratio allows you to meet customer demand, have an adequate and ever-changing supply of inventory, and maintain adequate cash flow. For most retailers, this means a stock to sales ratio of 3:1, although there are a few industries where 4:1 is more common.
A ratio of 3:1 or 4:1 is large enough to accommodate increasing sales, particularly if you maintain this same ratio as your business grows. If your ratio drops to 2:1 or 1:1, you’re in peril of not being able to grow — as you won’t have new merchandise to satisfy a greater number of customers — or worse, boring your customers away, as you always have the same old, same old.
Bear in mind that there may be lines or products within your store that you have a relatively fixed demand for. For example, a bookstore might definitively know that they sell one OED dictionary every quarter. For that one item, you’ll want a 1:1 ratio…because there’s a historical pattern that has established that need.
That being said, the stock to sales ratio can be applied to particular lines of merchandise, as well as to your store as a whole. Carefully consideration of the stock to sales ratio when you’re looking at individual lines can help you prevent overbuying any one type of merchandise.
Your Stock to Sales Ratio and Timing
Bear in mind that your stock to sales ratio is not a static number! Every business has busy times and slow times: garden stores need to have the most inventory during planting season, for example, while toy stores start really loading up on inventory as the holiday season approaches.
That means that if you look at your stock to sales ratio on any one day, it may be very skewed. The day you’ve just placed three big orders can be the same day you have a slow sales day (in fact, sometimes it seems like that’s always the case!) Your stock to sales ratio that one day can be horrible — but that doesn’t matter. You need to look at your stock to sales ratio over a meaningful period of time: a month or a quarter, for example. If your stock to sales ratio over this period of time is close to 3:1, you’re in good shape. However, if it’s not, it’s time to adjust your behavior!