Part 2: Knowing Your Numbers —Understanding the Key Metrics Driving Your Retail Business
Have I read this before? Nope! We posted last week about retail metrics and ‘numbers to know’ but it was all about sales. This week we’re zooming in on the critical element that makes your smashing sales possible: inventory. We may have said it before but, “Know your numbers!” More than just a catchy phrase, it’s a guiding principle that can make or break your retail business. “
Knowing Your Numbers: Understanding the Key Metrics Driving Your Retail Business
Let’s refresh - if you’re involved with a product-based brand, data is your friend. Understanding your key performance indicators (KPIs) and tracking the most important metrics might cause your eyes to glaze over a bit, but if you can get yourself to focus you’ll see a clear path forward for the business.
Last week we covered all the essentials of sales metrics. This week, we’re setting our sights on your inventory as well as shed some light on a few figures that are integral to thinking strategically about your business.
Reminder—there’s a lot to this topic! We’ve divided up this topic into 2 parts to help keep things clear and easily digestable. As you read both parts if you’re unsure of where to start, contact our team to learn how they can help you build a customized plan for your business.
What numbers should I know for my retail business?
For many retail owners, especially those who find joy in the more creative aspects of building a brand, knowing your numbers seems like a daunting prospect.
“Knowing your numbers” is essentially shorthand for having a thorough understanding of the metrics that drive your business forward. In short, your particular set of numbers will come down to your product. Are you commodity, food, seasonal, or fashion-based? A candymaker will have to plan sales and inventory very differently than the home store selling weatherproof patio furniture! As discussed last week At Boon, we look at a business’ numbers in two primary ways:
Key performance indicators (KPIs)—these are the core metrics you should know like the back of your hand—the ones that give you a sense of your business’s overall health. These include cost, sales plan, initial markup percentage (IMU%), and average weekly sales.
Critical metrics - your supporting data that help you stay abreast of your business’ performance or are specific to the type of retail business you run. Forecast variance, On Hand inventory, Presmin, and storage cost are examples of numbers that will be important to most businesses for sales analysis, but may be more or less important based on your specific type of business.
While any business will need to keep track of how much they’re spending on inventory (receipts) a sportswear company may need to emphasize size distribution and seasonality, while a furniture company would likely focus more on metrics associated with shipping efficiently.
When it comes to tracking retail numbers, the list is extensive, so this week’s post will focus on the numbers associated with inventory. Keep in mind the interplay of sales and inventory metrics will provide you with invaluable insights into your business’ financial health, ultimately allowing you to make informed decisions to keep your business booming.
A beginner’s glossary to key retail inventory metrics & KPIs
You’ve probably already thought about the nuances of your industry and have some idea of which numbers are the most important for your business. To help your industry vocab stay on fleek we’ve compiled a list of most commonly tracked numbers for businesses that sell physical products with their definitions so you can easily identify which line items are right for you.
While all of the metrics listed below may not be vital to your business, we’ve seen many examples of clients who overlooked specifics in favor of generalities (Spoiler alert: It doesn’t turn out well!), so we wanted to provide everything so you have a full breadth of what’s out there.
Inventory - Metrics that show the quantity and value of your inventory commitment.
** indicates a KPI that we recommend you know off the top of your head.
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A measurement of the amount of inventory you have as compared to your ideal inventory levels.
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Your inventory plan is your best educated guess at the inventory you will need to support your sales for the year, and should be divvyed up by key time frames as well as each item in your assortment.
Most businesses create a plan at least once a year, far in advance of your selling period. Your inventory plan is based on sales and is often your largest financial investment.
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Forecast denotes how your business is tracking to your plan. Measured in dollars, units and percentages, your forecast will vary throughout the year as you may be up (+) against plan or down (-) against plan.
Your forecast is always changing and will likely need to be adjusted in concert with your actual sales performance.
We guide clients to do the practice of forecasting monthly, if possible, depending on the size and complexity of their business. This is especially important with inventory since production schedules are often far ahead of sales actualization. Continually forecasting can help you avoid costly mistakes in over or under buying inventory.
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Inventory turnover, sometimes shortened as ‘turn’ is a measurement of how much of your total inventory you’ve sold through in a certain time period.
Calculated by dividing the cost of goods by average inventory for the same period. A higher ratio can indicate strong sales, and low UPI and a lower ratio to slow sales and likely more UPI.
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Denote how much product you’re required to order in a single order from your manufacturer.
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The amount of product that a company owns and has in stock, available for purchase.
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An inventory management strategy that helps retailers understand how many products to buy.
OTB can be calculated by using this formula:
OTB = Beginning on Hand Inventory (BOH) - [ Sales + Markdowns + End of Month Inventory (EOH) ] -
Presmin is your stock allocated to presentation in-store to allow customers to see your product before purchase. You should have more than one item reserved for presmin in case a customer takes that item for purchase. Depending on the product you sell, your number of presmin will vary. For instance, you will likely hold presmin in different sizes if you’re a clothing store, but if you sell housewares, you likely will have fewer presmin couches.
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Safety stock denotes how much inventory you have stored in-store or at your warehouse to avoid out-of-stock situations.
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A financial drag on your business, UPI is the level of items in your assortment that are considered unproductive. This level varies by retailer and business-type. This inventory reflects cash you’ve spent buying from your supplier but haven’t been able to recoup through a sale to your customers.
Additional Retail Metrics - Relevant for sales and inventory analysis as well as impressing your colleagues.
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The amount of time it takes for your products to be manufactured by your supplier and be ready to ship to your customers.
Helps businesses calculate reorder needs and anticipate instock levels.
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The literal number of places a customer could buy your or discover your product. The ways in which customers are discovering your product will drastically affect your numbers as different channels can have different fees or specifics
Knowing this number helps mark a company’s growth and market penetration as well as helps with calculating average weekly sales, sales by region, Instock %, Presmin and Safety Stock levels.
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A process in accounting that determines at what point a company will break-even (and hopefully, eventually, become profitable!). It calculates how many products or services you must sell to cover your costs.
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A ratio used to calculate the benefit an investor will receive in relation to their investment cost.
It’s calculated by subtracting the initial cost of the investment from its final value, dividing the new number by the cost of investment, then multiplying by 100.
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Helps certain retailers improve their margins by committing to more product at once, but having a lot of product on hand can also drive up storage costs and lead to expired or unproductive inventory.
Most relevant for retailers that deal with larger products like furniture or for retailers with a lot of sales velocity on evergreen products.
You might be thinking —”wait..I thought cost and price were covered last week?” You’re right! However, in an effort to avoid overwhelm we limited our list last week. We’ve included just a few additional metrics that are key for important analyzing your business’ sales and inventory together.
Cost and Price- Key retail metrics for analyzing your items and margin rates
** indicates a KPI that we recommend you know off the top of your head.
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The total cost for you to produce a single product, which includes costs associated with raw materials and production.
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A common retailer metric calculated to determine the carrying value of goods sold during a particular period. Formula: Starting inventory + purchases - ending inventory = cost of goods sold
To make COGS work in practice you need a clear and consistent approach to valuing your inventory and accounting for your costs. -
The portion of a company’s revenue after direct costs are subtracted. It can be measured by dollar amount and/or percentage.
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A common retailer metric used to determine the initial retail price of their products.
To calculate your IMU% you can use the following equation:
($ Original price-$ Cost)/$Original price = Initial Markup %
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How much it costs you to buy the material needed to produce an item for sale.
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How much your customer pays for your product.
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How much it costs to create or manufacture your finished product. Includes labor expenses.
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How much it costs for your product to get to a customer. This includes all of the transportation involved, and can be segmented into costs associated with product getting to your warehouse, as well as costs associated with moving your warehoused product to customers or stores.
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How much it costs for your warehouse to store inventory. If your product is sold in brick-and-mortar stores, there may be store-specific costs of storage.
OK. That’s a lot. Why can’t I just track sales and forget about inventory?
Numbers associated with inventory illustrate part of the way you’re spending money as a business.
Your inventory is a key investment that funds or supports your sales. In fact, sales and inventory go hand-in-hand and you need to have just the right amount of inventory in order to support your sales, but also have enough cash on hand to fund your business and take strategic action if your demand plan doesn’t come to fruition. While the concepts of ‘demand planning’ and ‘inventory forecasting’ themselves aren’t overly complicated, compiling all of the data inputs into accurate, understandable analysis IS complex.
If you’re just starting out tracking and understanding all of the retail KPIs and metrics can be overwhelming. In our experience with young and start-up businesses keeping both sales and inventory in mind help you effectively manage your cashflow. Getting detailed with your demand plan and inventory forecast will also put you in a more advantageous position when it’s time to scale your business.
One more pro tip: for a better understanding of your inventory spend (AKA receipts), sales gain and promotional effectiveness analyze your sales and inventory metrics both by units AND dollars.
How often should I track my core retail KPIs?
The frequency of tracking numbers will depend on the size and complexity of your business, so establish a process that works for you. While weekly tracking and monthly re-forecasting are considered a best practice, larger and more intricate businesses will likely benefit from more frequent reviews. This can also be the case if you’re a business with an intricate product that requires a number of different components. For example, a bra retailer needs to track costs related to fabric, foam cups, closures, elastic straps, and much more.
No matter your business’ complexity, establishing a regular cadence with your key internal team will not only help keep everyone aligned on your business’s goals, but also help you adapt quickly to changing market conditions—that way you can get ahead of excess inventory or missed sales opportunities.
This was a ton of inventory info. Where should I even start?
We know this is a lot—but the good news is that since the Boon team has over 150 years of experience in sales and inventory planning, we’ve got it figured out!
If you find yourself struggling to identify the right sets of numbers to track for your business, or how to make sense of the sales and inventory reporting you can access. We’re here for you, and can customize our services based on your business’ needs and budget. Make an appointment with our team of specialists. Our free 30 minute discovery call is an excellent way to assess if a quick fix or a process overhaul would serve your business best.
Another option - utilize our Sales + Inventory Planning Toolkit. With 2024 right around the corner you might want a super-quick way to validate your sales and inventory plans. Our comprehensive toolkit can be the ideal solution for start-up and solopreneur businesses that want to manage all of their analysis and reporting in-house. Download now and use these tools for years to come.
Why work with Boon?
As a business owner, you’re not just burning the candle at both ends—most days, the house is on fire! From marketing to hiring to production and everything in between, your attention is always needed somewhere. That’s when the complexities of demand planning can be overlooked or generalized, which can lead to expensive mistakes or inventory challenges down the line.
We’ve found that retailers are often inventors or creatives who have a brilliant product but not a lot of experience with demand planning, financial processes, and sales strategy. With industry expertise across all retail niches, Boon serves as your ally in planning, helping you identify all the numbers you need to track, taking work off your plate, and distilling your data into easy-to-understand tools and processes. We work with businesses of all sizes and have saved our clients as much as 50 hours a week!
We can also provide new businesses with an idea of what to expect as you grow. Do you have no idea how to anticipate sales? With our team’s breadth of knowledge, we can provide an overview of what to expect with sales trends, what it’s like to expand into a new channel, or how to add or subtract items from your assortment. (Don’t worry—we never share proprietary information!).
Don’t use your time trying to decipher Excel formulas—keep your focus and momentum on the things you love and leave the spreadsheet wizardry to us. Get in touch today!
