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Dear Jeff,
I’ve heard a lot about
stock turn and I think I understand what it means, but can
you use it to calculate how much stock you need in the future
rather than just stating a statistic about what you have
done in the past?
What I really want to know
is, how much stock should I be carrying at any one time?
If I carry too much, I end up trading it and suffering a
loss after 90 days. If I don’t carry enough stock I
don’t hit my budget!
Do you have an answer for
this?
Regards,
Steve Bruce
* * * * *
Many thanks for your question Steve, you have not stated
whether this is for used cars, used trucks, used bikes or
used power equipment, but the strategy is the same. It can
be quite complex, but here’s the simple version.
As with all business decisions,
your focus should be on Return on Investment (ROI); are
you going to get back more profit than the money you are
investing? First set your target, I suggest 120% (If you
are at all unfamiliar with Used Vehicle ROI, see The KPI
Book, page 46)
The next question is how
many vehicles are you going to sell and how much Direct
Profit will they generate? For the sake of this exercise,
let’s say that we’re going to generate a Direct
Profit of £250,000.
Now let’s take a look
at these two figures. If £250,000 represents 120%
ROI, then the stock holding would be around £210,000.
To calculate this: Profit ÷ ROI%, or in this example
£250,000 ÷ 120% = £208,333. I simply
rounded up to £210,000.
The instruction to the Sales
Manager is, “You have a maximum fund availability of
£210,000 for the sole purpose of used vehicle stock.
Do not exceed it”.
Now the Sales Manger thinks,
“If my average SIV is £7,000 how many vehicles
can I hold in stock at any one time?”
£210,000 ÷ £7,000
= 30 units
Now it is the down to the
skill of the Sales Manager to manage that £210,000
and the 30 units to the best of their ability so that they
generate a profit of £250,000.
When you improve your stock
turn by selling more vehicles or holding fewer vehicles
in stock or a mixture of both, your ROI% will increase.
This gives you a magic window of opportunity because you
have more time to recover from mistakes (you will make a
few) and it will be much easier to achieve your profit objectives.
The golden rule is to take
the emotion out of the product and place all your focus
on money.
Best regards,
Jeff Smith
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