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December 02, 2008
Are you a music store owner with a lot of inventory and a lot of cash flow problems? Do you often wonder where your money is going each month, and why you still can’t take a decent owner’s salary? If the answer to these questions is “yes,” you probably don’t know what your GMROI is. This great analytical tool is for you! Regardless of if you have to calculate it by hand (even though your Point-of-Sale software will probably do this for you), tracking GMROI can revolutionize the cash flow of your business.
How to Calculate GMROI
GMROI, or Gross Margin Return On Investment (the investment, in this case, is inventory), is a great tool to use to track the efficiency and productivity of your largest investment—inventory. It is calculated by taking the gross profits made over the last 12 months and dividing it by the average inventory dollars on hand over those same 12 months. This calculation can be run on your entire inventory, or even a single SKU, to see how productive your inventory investment is working for you.