TURNOVER & RETURN ON INVESTMENT (ROI)
by Alan J. Zell, Ambassador of Selling

The name of the game is "turnover" . . . how many times in a given period (usually 1 year) something is bought/sold, bought/sold, bought/sold. Buying 10 items and selling them is a 1 time turn; buying one, selling one, ten times is 10 turns. (In some countries, the term "turnover" refers to total sales and not turns of inventory. Do not confuse these terms.) As the price and markup increases, the number or turns, very likely, will decrease.

Another way of showing the importance of turnover is called "Return On Investment." If one were to buy, as above 100 items at $10.00 and sell them for $20.00, when they are all sold the revenue is $2000. Subtracting the cost and one has a gross profit of $1000 on their $1000 investment. However, if one were to buy/sell 10 items/units 10 times the total sales and gross profit would be the same but the investment at any one time would only be $100.00 to deliver the same $1000.00 of gross profit.

An additional point to consider is that every day a firm own inventory, it costs more money . . . money that could be in the bank earning interest, used to pay off a loan, or used to buy other things that would sell faster and more often. (See article on the 80/20 Rule)

For service businesses, the need for turnover and return on investment is also applicable. Materials developed for a client, if they can be used for other clients with/without some changes, then the cost of developing them decreases with each additional use yet the income from their use would carry a greater markup than before. This is called "an inventory of ideas."

This turnover theory can be applied to individual items, departments, or the whole store. While not always understood, turnover is just one factor in making a profit. The other is mark-up. Mark-up alone will not produce a profit unless the markup is sufficient enough that it takes only one sale to make a profit. Mark-up and overhead are the two factors needed in determining the number of turns it takes to make a profit. For example:

Using a 100% markup (2 x cost) as above, Increasing markup to 2.25%:
If overhead is 35%, it takes approximately 3.5 turns If overhead is 35%, it takes approximately 1.25 turns
If overhead is 40%, it takes approximately 5.5 turns If overhead is 40%, it takes approximately 1.50 turns
If overhead is 45%, it takes approximately 7.5 turns If overhead is 45%, it takes approximately 1.75 turns
If overhead is 50%, then markup has to be increased If overhead is 50%, it takes approximately 2 turns

What this shows that not only markup but "rate of sale" (how many, how often and when things sell) and overhead are very important factors in making a profit.

    NOTE: Both terms, "turnover" and "ROI" are after-the-fact numbers that are goals to work towards but can only be determined when all the figures are in.

This article was written to help you and your business. If you believe some of these articles will be helpful to your business, please e-mail me your comments on how you will apply them. ajz

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Alan J. Zell, Ambassador Of Selling
P.O. Box 69 Portland, Oregon, USA 97207-0069

Email: azell@aol.com
Telephone: (503) 241-1988