m


  m 
?

GMROII is a conceptually simple method for measuring which inventory items (or categories, or
brands) give you your best return on your investment in that inventory. It combines gross profit
with inventory turns in a way that allows you to compare the profitability of snowboards (or a
particular snowboard) with, say, surf wax at the gross profit level. It·s not perfect, and we·ll
discuss the caveats below, but it looks like it can be very useful.

Just as a refresher, inventory turn refers to how many times you have to replenish your inventory
for a given level of sales over the year. It·s important because the more turns you have, the less
inventory you can carry for a given level of sales. And the less chance your inventory will have to
be marked down. Carrying extra inventory costs you money in lots of ways including cost of
capital, overhead, and opportunity cost when you have money tied up in something that takes a
long time to sell and has to be discounted instead of in fast moving, full margin inventory.

The GMROII calculation itself is simple. It·s just the number of gross margin dollars you make
selling a product (or category or brand) over whatever period of time you choose to measure it
divided by the average inventory at cost over the same period. Typically, it·s done over a year. The
result is a number (in dollars- not a percentage) that tells you how many gross margin dollars you
earned for each dollar invested in inventory over the period.
àaving calculated these numbers, what might you do with them? For
the first time, you·ll be able to compare what I·ll call the inventory
financial efficiency (I just made that up! Kind of like it) of any item you
sell with any other item. You can also do it for a brand or a
category. You can actually say, based on the example above, I·d rather
sell the same amount of Item A than Item B even though one sells for
$600 and the other sells for $12.00 and they are in completely
unrelated categories. You can see which ones you·re wasting your time
selling (or at least recognize that there·s no financial reason to be
selling them). You can eliminate too much emphasis on gross profit
margin, which I think you can see in the table below can be
misleading. You may significantly reduce your inventory investment.

The GMROII is the number of gross margin dollars generated for each
dollar of inventory you had in that category over the period of a year. If
you could plan your whole business around GMROII, obviously you·d
get rid of everything but long completes and just sell them. But your
customers probably wouldn·t go along with that.
GMROII is a financial measure that tells us what return we are making
on our inventory investment. It is the only financial ratio formula that
returns a dollar answer not a percentage. The question that GMROII
answers is ´For every dollar that I invest in inventory, what is my
return?µ
GMROII is the measure that helps you to balance the turnover of an item
and its retail price.
If you have an item that turns only twice a year you have to make a much
higher profit on that item as you are only making the profit two times and
yet paying to keep the item the entire year. Contrast this with an item
that you will sell three of per week or 156 per year and only need to pay to
keep six on
hand. Your investment in the slow turning item is longer and therefore
more costly.
Increasing gross margin return on inventory (GMROI) should be a primary
business objective. The higher your GMROI, the faster your cash flow velocity.
This metric measures how many gross margin dollars you produce per dollar of
inventory invested. àigh profit stores typically get $2.94 in GMROI while low
profit stores have a GMROI of around $2.02. The difference of $0.92 translates
into $920,000 per year in gross margin for an operation with a million dollars
in inventory! GMROI = annualized gross margin dollars / inventory on hand.
Use average inventory numbers if you have them, but keep the time-frame
shorter than three months, so that you can gauge improvement. Gross margin
dollars are calculated by deducting cost of goods sold from net sales.


 
 ?
 
  

 ? 
This is a useful measure as it helps the investor, or management, see the
average amount that the inventory returns above its cost. A ratio higher than 1
means the firm is selling the merchandise for more than what it costs the firm
to acquire it. The opposite is true for a ratio below 1.

For example, say a firm has a gross margin of $129,500 and an average
inventory cost of $83,000. This firm's GMROI is 1.56, which means it earns
revenues of 156% of costs
GMROII is a conceptually simple method for measuring which inventory items
(or categories, or brands) give you your best return on your investment in that
inventory
The formula for GMROII is simply Gross Margin (the profit ² or return
on investment you make in selling an item ² after any
discounts/markdowns are taken) divided by the average inventory at
cost (the ´investmentµ that you have made).
Let·s look at two very different items and the GMROII on each.
  
  !

"  #" $%% !  $&%% ! 

'

in inventory all the time so your investment at cost is $30 ($5.00 times
6 items). In one year, if you sell the 156 at full price of
$7.00 you make a profit of $2.00 per item for a total profit of $312.00.
To make the $312 profit, you only had to invest $30
in inventory cost. So, your GMROII is $10.40 ($312 divided by $30),
which means that for every dollar that you invested in
inventory you made a $10.40 return.
() !!

   !

"  #" $*+%% 
 $,,,%% '

two in inventory so your investment is

$650 ($325 times 2 items). In one year
you sell two items for total sales of
$1,998.00 and make $674 per item or
$1,348 for the two. To make $1,348 sales
you had to invest $650 in inventory. So,
your GMROII is $2.07 ($1,348 divided by
$650) which means that for every dollar
that you invested in inventory you made
a $2.07 return.
The two examples above clearly show the difference that a GMROII
analysis can make. The first item has a Gross Margin of 28.6%4 ,
while the second item has a Gross Margin of 67.5% . If we were just to
consider Gross Margin, we would identify item B with the 67.5%
margin as being very good and item A with a 28.6% margin as being not
so profitable. Whereas, the GMROII analysis demonstrates the
productivity of item A over item B.
àowever, we also have to remember that we don·t pay the bills with
percentages. Item A only put $312 in my checking account while
Item B put $1,348. Clearly, a balance must be achieved between dollars
and GMROII rates. A $2.07 GMROII may represent substantial
dollars in the above example, but for most stores, this is actually a break
even. The first dollar of the $2.07 is simply the dollar that we
initially invested and the second $1.07 has to be used to pay all operating
expenses such as rent, payroll, supplies, advertising etc. So
a GMROII of $2.00 is considered just a break even and we really should
be setting a benchmark of at least $3.00 for each
category/item in our stores.
•
-(.-

/-0
1112/)- /1-
-)
•rofitability ratios provide information about management's performance in
using the resources of the small business. As Gill noted, most entrepreneurs
decide to start their own businesses in order to earn a better return on their
money than would be available through a bank or other low-risk investments. If
profitability ratios demonstrate that this is not occurring³particularly once a
small business has moved beyond the start-up phase³then the entrepreneur
should consider selling the business and reinvesting his or her money
elsewhere. àowever, it is important to note that many factors can influence
profitability ratios, including changes in price, volume, or expenses, as well the
purchase of assets or the borrowing of money. Some specific profitability ratios
follow, along with the means of calculating them and their meaning to a small
business owner or manager.

Read more: Financial Ratios - percentage, type, cost, •rofitability or return on

investment ratios, Liquidity ratios, Leverage ratios, Efficiency ratios, Summary
http://www.referenceforbusiness.com/small/Eq-Inc/Financial-
Ratios.html#ixzz1FqxkKCgh
?

 
Gross •rofits / Net Sales³measures the margin on
sales the company is achieving. It can be an indication of manufacturing
efficiency or marketing effectiveness.


 
Net Income / Net Sales³measures the overall
profitability of the company, or how much is being brought to the bottom
line. Strong gross profitability combined with weak net profitability may
indicate a problem with indirect operating expenses or non-operating
items, such as interest expense. In general terms, net profitability shows
the effectiveness of management. Though the optimal level depends on the
type of business, the ratios can be compared for firms in the same industry.

 

Net Income / Total Assets³indicates how effectively
the company is deploying its assets. A very low ROA usually indicates
inefficient management, whereas a high ROA means efficient
management. àowever, this ratio can be distorted by depreciation or any
unusual expenses.

 


 Net Income / Owners' Equity³indicates how well the
company is utilizing its equity investment. Due to leverage, this measure will
generally be higher than return on assets. ROI is considered to be one of the
best indicators of profitability. It is also a good figure to compare against
competitors or an industry average. Experts suggest that companies usually
need at least 10-14 percent ROI in order to fund future growth. If this ratio is
too low, it can indicate poor management performance or a highly conservative
business approach. On the other hand, a high ROI can mean that management
is doing a good job, or that the firm is undercapitalized.
.   look at the extent that a company has depended upon
borrowing to finance its operations. As a result, these ratios are reviewed
closely by bankers and investors. Most leverage ratios compare assets or
net worth with liabilities. A high leverage ratio may increase a company's
exposure to risk and business downturns, but along with this higher risk
also comes the potential for higher returns.

È 
 
Debt / Owners' Equity³indicates the relative mix of

the company's investor-supplied capital. A company is generally considered
safer if it has a low debt to equity ratio³that is, a higher proportion of
owner-supplied capital³though a very low ratio can indicate excessive
caution. In general, debt should be between 50 and 80 percent of equity.

È  
Debt / Total Assets³measures the portion of a company's

capital that is provided by borrowing. A debt ratio greater than 1.0 means
the company has negative net worth, and is technically bankrupt. This
ratio is similar, and can easily be converted to, the debt to equity ratio