Secret of Smart Inventory Management – Tip Of The Month

Last month we talked about how to calculate your interest expense as a percentage of gross sales and what your optimum target should be. If your interest is not on target then we need to explore the reasons why. Find out what your target should be.

Setting aside fixed loan payments, there are two contributing factors to the Interest & Bank Charges expense line on your Profit & Loss Statement. The first is generated through your bank operating line of credit and the second is from your inventory floor plan outstanding balance.

In this article I'll discuss inventory floor plan interest since this is typically the biggest contributor to this expense. As discussed in a previous article, there is no magic formula to managing inventory. It requires diligence, consistent review, good management policies and little bit of luck.

You can however, calculate whether your unit inventory is contributing to over expenditure in this expense category. Every industry has a defined inventory turn ratio that dictates whether you are on target for the year.

For the Motorsports industry a good target is 3.5 to 4 turns per year and for the Marine industry it is 3 to 3.5 turns per year. This is calculated by dividing your cost of goods sold (for the year) by your average inventory (units, parts & accessories).

Your inventory turn-over rate measures the number of times your inventory is sold in a year. If you are only turning at a rate of 2 or less times per year you can be fairly certain that you are paying too much in floor plan interest expense.

There are a number of things you should be considering when analyzing your inventory turns:

1. Have you considered your competition in the market place for the upcoming season?

2. What new products are you competing against?

3. What are the regional and global economic influences for your market?

4. What is your sales history for the last 3 to 5 years?

5. Have you carefully analyzed your OEM sales programs for the next season and most important the length of free floor plan and target objective extensions?

6. Do you have a plan for marketing units that are going to extend past free floor plan

7. Are you employing the FIFO inventory policy (first in first out)

8. What are your OEM policies on unit transfers, returns and floor plan extensions

While inventory turns is a great indicator to the health of your business, you must go beyond just the number of turns per year. It is imperative that you watch the aging of your inventory each month and focus on problem models that are not selling

When you sit down with your District Sales Manager to place your next unit booking order, make sure you explore solutions and answers to all of these questions and consider them in your business plan.

You will stack the deck in your favour for optimizing your orders while minimizing your interest expense. Authenticating your unit purchases for the next season is the most critical part of your business plan.

if you want to find out more about how to minimize your inventory management interest expense, call me for a free tele-consult or contact me

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