The goods that sit on your shelves and floor represent a major capital expenditure. In reality, it likely represents one of the largest expense classes on your books (though technically speaking, it carries as an asset). Many independent outlets understand that carrying their inventory is dear. However, they realize it in the context of the money they have paid to their vendors. The true cost of your retail inventory might be far larger than you realize.
In this piece, we ll put aside the simple expenses associated with your merchandise and look in more detail at one or two subordinate costs. I should explain how financing, insurance, storage and handling, shrink and damage, and missed opportunities are sometimes neglected, but can be surprisingly costly.
Expenses Associated With Financing
Chances are, you are financing a portion of your inventory through outside sources. Determining the cost of that financing as it applies to your products could be complex. As an example, suppose you are self financing half of your stock and using an external credit line to finance the remaining fifty percent. In this example, it is reasonably straightforward to spot interest costs.
But , suppose you re using your line of credit to finance other items, for example receivables or payroll. If that is the case, figuring out the financial charges that are attributable to your merchandise is tougher. Given that you should be privy to the true price of carrying your inventory, the ambiguity is difficult.
Insuring Your Goods
Insurance for your retail stock is far easier to work out than finance charges. It is usually based on the aggregate cost of the things. Oddly, many little outlets neglect this expense when identifying their inventory s carrying cost.
Storage And Handling expenses
Ideally, because it s so expensive to carry, you would have as little stock on hand as possible . That said , you will have a need to store your products in a separate stockroom or warehouse. Understanding the carrying cost associated with storage may be more complex than it appears.
First, you want to spot the portion of rent and property taxes that can be traced to your storage area. Second, you ll need to do the same for utilities, insurance, and maintenance items. Third, you should include the foregone rent that you might otherwise receive from a renter for the same space.
Determining handling expenses for your products can be likewise challenging. This cost should represent the time that your employees spend receiving, sorting, packing, and moving the stock to your showroom. It should also take into consideration any depreciation of equipment used toward its handling. And if you re financing that apparatus through outside sources, it becomes even more tough to identify the true cost.
Shrinkage And Damage
Normally, you would write off any stock that was damaged while in your possession, or lost to shrink. However , figuring out the value of the write off can become difficult if you and your staff have not performed regular cycle counts. If certain goods have a greater than average turnover rate, you should be performing more frequent cycle counts.
If you neglect to perform these counts, you may end up extending write offs from shrink and damage that you should have taken earlier. That further muddies the waters and makes it difficult to identify the true cost of carrying your inventory.
The capital that you have invested in your goods only represents the start of your stock s carrying cost. Financing, insurance, storage and handling, shrink and damage all make a contribution to that cost. What s more, you should consider the value of missed opportunities from having your limited money flow trapped in sterile inventory. That capital can be used productively somewhere else. As an independent retailer, it is critical that you maximise your limited cash flow by tightening your stock. That s the secret to having the ability to explore other moneymaking possibilities.
Author Resource:
G.A. Wright specializes in high-impact http://www.gawrightsales.com/ events that bring in big sales volume and attract huge crowds. Check out our website for more information: http://www.GAWrightSales.com
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