What are the best tools to identify customers that are about to churn?
Best answer to your question:
- Inventory Turnover
Inventory Turnover Ratio = Cost of Goods Sold / (Beginning Inventory + Ending Inventory)/2
An example by Investopedia states that if company A has $1 million in sales, the cost of goods is only $250,000, and the average inventory is $25,000. $250,000 divided by $25,000, equals a turnover rate of 10%.
A high turnover rate means your business is selling products as quickly as they come in and a low turnover rate means that product is much slower to move off the shelves. If you’re experiencing low turnover rate you could be ordering too much of a product, resulting in slow moving inventory and operational inefficiencies.
2. Average Days To Sell Inventory
Average days to sell will vary from business to business and product to product. A general rule of thumb is that an item is considered slow-moving if it has had less than six months of demand.
For a more accurate calculation, you can implement forecasting tools. This is particularly critical for those items that operate at different life cycles than your mean inventory turnover. If items cannot be accurately forecasted and there is variance in shelf life, you are experiencing slow moving inventory.
3. Holding Costs
This is the cost a business incurs from storing inventory. This could include the cost of storage, depreciation, staffing, maintenance, insurance, security, and the overall cost of capital for the business.
Holding costs may seem trivial at first glance but can accrue into massive losses. A slow-mover doesn’t just hurt sales but creates costly operational inefficiencies.
4. Determine Gross Profit
Once all the costs have been attributed to the item, determine its current gross profit. This is simply the price of product minus the cost to make, hold, and sell that good. When identifying a slow-mover, it’s important to see how the costs affect the selling price and what that does to customer demand.
5. Forecasting
Using short-term and long-term historical data will help you discover patterns in your inventory. Whether it be seasonal, promotional, or overall trends, you can compare inventory turnover rates against customer demand upswings and plateaus. What may seem like minute changes at the time, may need management attention in a longer-term context. Knowing your item’s gross profit, its inventory costs, and seasonality fluxes will help you identify which inventory is moving slowly and empower you to make informed inventory decisions.
