Understanding common ratios in your business allows you to fine tune your sales and marketing plan in order to maximize profit. Ratios also tell you important information about where your business is headed--whether you are improving in the markets you serve or whether you are headed for the dangerous rocks. There are two important sales ratios that every business owner, from the mom-and-pop convenience store to multi-national corporations, should know and calculate on a regular basis. The first is the sales mix ratio. This ratio tells you how much of your total sales is comprised of each product or service you offer. When you review this information along with your profit margins on each of your products or services, you can tell how much of your sales is providing you with the most profit. The second important sales ratio is the inventory turnover ratio. This ratio tells you whether your inventory levels are increasing or decreasing. This is critical information because holding inventory costs your business money in not only the cost of the product but also in storage and obsolescence costs. This article will show you calculate each sales ratio.
Instructions
Calculating Sales Mix
1. Sales mix is simply the percentage each of your products or services contributes to your total sales. This is important to understand because changes in your sales mix over time can affect your overall profits. The first piece of information you need is the profit contribution of each of your products or services. The sales information you track should detail out the sales and cost of goods sold for each major category of product or service. The profit per unit divided by the cost of the unit gives you your profit percentage.
2. Divide the sales of each product or service by your total sales. For example, if you sell ten products in your retail store and the first one counts for $1,000 of your total $9,000 in sales, the percentage that the product represents is $1,000 divided by $9,000, or equals 11 percent. Do this math for each of your products or services to come up with your sales mix.
3. Your goal is to maximize the sales of your higher-profit products or services and minimize the sales of your lower-profit ones. Gear your sales and marketing plan towards focusing on the high-profit items. You will know if you are being successful by recalculating your sales mix frequently. If the percentage of high-profit items is rising, you know that your efforts are successful.
Calculating Inventory Turnover
4. Inventory turnover tells you how often your inventory is sold and new inventory is brought in to replace it. You will need to know your sales for a period of time (you can calculate your inventory turnover annually, quarterly or monthly) and your average inventory balances for that period. For example, if you are calculating your inventory turnover for a month, you would take your inventory at the beginning of the month and add it to the inventory at the end of the month and divide that sum by two to get your average inventory.
5. Your inventory turnover is calculated as sales divided by average Inventory (which you calculated in Step 1). The resulting calculation isn't what is important; it's what happens to that number over time. If the number increases, it means that you are carrying more inventory compared to your sales level than you had been in the past. This means you are spending more money. A decreasing number means that you are using your inventory on hand more efficiently. Your inventory turnover should be calculated as part of your regular management reporting cycle.
6. If you are in an industry with public competitive information, calculate the inventory turnover for your major competitors and compare with your own to find out how efficiently your competition is using their inventory.
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