How Inventory Works (ep 134)Jun 19, 2023
We're on the third week of working through my Inventory Genius Method. During these conversations we'll cover all the basics of inventory-based business ownership. In today's episode, we're discussing how inventory works. Let's get going!
In the third chapter of my book, Inventory Genius, I talk about my own story as it relates to inventory. I have handled so much inventory in my time as a business owner, but for awhile, I had no idea where all the cash was going.
Inventory is just like cash. When you exchange money for inventory, that inventory is turning into an asset for you. Inventory is all over your warehouse. It's cash on hangers and cash in boxes.
The quicker we can turn this cash into more cash, the better our businesses will be.
There are five main categories on a Profit and Loss statement and four of them are connected to inventory. Let's take a look...
Sales: I strongly encourage you to separate sales of inventory and sales of services. You want to see how these sales numbers compare. Anytime we can get granular with our information, we will have more power to make better decisions.
Cost of Goods Sold: The cost of the inventory that's sold and is no longer in your store - not of what you purchased but the cost of what's actually sold.
Gross Margin: The difference between sales and cost of good sold. We want this to be a healthy number. A healthy gross margin creates a healthy net profit.
Expenses: This is the only section that doesn't have to do with inventory.
Net Sales: The difference between your gross margin and your expenses. This shows whether or not you're profitable. You can create a debt payoff plan from profitability.
Here are three things to focus on if we want to use our inventory to create profitability:
1. Increase sales.
2. Increase margin
3. Lower expenses.
Our goal is to use the lifeblood of our business - our inventory - to increase our business' profitability.
Here's a glance at the episode:
[2:27] Ciara shares from her book Inventory Genius and jumps into how inventory works.
[5:30] Inventory and your profit and loss statement.
[12:30] Three things to focus on
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