priprema - eng

8/7/2019 priprema - eng

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GMROII

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. Its not perfect, and well

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. Its 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 along time to sell and has to be discounted instead of in fast moving, full margin inventory.

The GMROII calculation itself is simple. Its 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, its 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.


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Having calculated these numbers, what might you do with them? For

the first time, youll be able to compare what Ill call the inventory

financial efficiency (I just made that up! Kind of like it) of any item yousell with any other item. You can also do it for a brand or a

category. You can actually say, based on the example above, Id 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 youre wasting your time

selling (or at least recognize that theres no financial reason to beselling 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 youd

get rid of everything but long completes and just sell them. But your

customers probably wouldnt go along with that.


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GMROII is a financial measure that tells us what return we are making

on our inventory investment. It is the only financial ratio formula thatreturns a dollar answer not a percentage. The question that GMROII

answers is For every dollar that I invest in inventory, what is my

return?

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.


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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. High profit stores typically get $2.94 in GMROI while lowprofit 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.

Investopedia explains Gross Margin Return On Investment - GMROI

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


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The formula for GMROII is simply Gross Margin (the profit or return

on investment you make in selling an item after any

discounts/markdowns are taken) divided by the average inventory at

cost (the investment that you have made).Lets look at two very different items and the GMROII on each.

Item A > Fast selling, low price item. You sell 156 of this item

per year. You buy it for $5.00 each and sell it for $7.00 each. You

keep six

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.


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Item B > Slow selling, high price

item. You sell two of these items per

year. You buy it for $325.00 and sell

it for $999.00. You keep

two in inventory so your investment is

$650 ($325 times 2 items). In one yearyou 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 dollarthat you invested in inventory you made

a $2.07 return.


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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 toconsider 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.However, we also have to remember that we dont pay the bills with

percentages. Item A only put $312 in my checking account whileItem 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. Soa 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.


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PROFITABILITY OR RETURN ON INVESTMENT RATIOS

Profitability 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 theirmoney than would be available through a bank or other low-risk investments. If

profitability ratios demonstrate that this is not occurringparticularly once a

small business has moved beyond the start-up phasethen the entrepreneur

should consider selling the business and reinvesting his or her money

elsewhere.However, 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, Profitability or return on

investment ratios, Liquidity ratios, Leverage ratios, Efficiency ratios, Summary

http://www.referenceforbusiness.com/small/Eq-Inc/Financial-

Ratios.html#ixzz1FqxkKCgh


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Gross profitability: Gross Profits / Net Salesmeasures the margin onsales the company is achieving. It can be an indication of manufacturing

efficiency or marketing effectiveness.

Net profitability: Net Income / Net Salesmeasures the overall

profitability of the company, or how much is being brought to the bottom

line. Strong gross profitability combined with weak net profitability mayindicate 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.


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Return on assets: Net Income / Total Assetsindicates how effectively

the company is deploying its assets. A very low ROA usually indicatesinefficient management, whereas a high ROA means efficient

management.However, this ratio can be distorted by depreciation or any

unusual expenses.


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Return on investment 1: Net Income / Owners' Equityindicates 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 againstcompetitors 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.


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Leverage ratios 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.

Debt to equity ratio: Debt / Owners' Equityindicates the relative mix of

the company's investor-supplied capital. A company is generally considered

safer if it has a low debt to equity ratiothat is, a higher proportion ofowner-supplied capitalthough a very low ratio can indicate excessive

caution. In general, debt should be between 50 and 80 percent of equity.

Debt ratio: Debt / Total Assetsmeasures 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. Thisratio is similar, and can easily be converted to, the debt to equity ratio

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