The Formula To Calculate Your GMROI

The Formula To Calculate Your GMROI

GMROI, also known as gross margin return on investment, is an inventory management metric. But what does that mean exactly? In short, GMROI evaluates profitability of your inventory with a simple ratio, analyzing the ability to turn said inventory into cash at a profitable rate above the cost of the inventory. So how do you calculate GMROI? The calculation is quite simple: to calculate GMROI take (gross margin $$)/(average inventory investment $$).

An Example of GMROI Calculation

So, to put all that into a workable example, say you have an annual gross margin is $500,000, whereas the average inventory value you hold is $300,000; in this case your GMROI would be 1.66. In some cases, GMROI is multiplied by 100, which with this example would leave GMROI at a value of 166. This formula is typically used by retailers to evaluate their inventory stock and value. A GMROI ratio above 1.00 is an indication that a company is selling their inventory at a higher value than it cost; and is making profit on that inventory. A strong target GMROI for a retail store is 3.20 or higher.

Turn and Earn Index As a Method of Inventory Management

As a purchasing manager, accountant, or other key financial role in your company, you may utilize a Turn and Earn index as a methodology to justify selling or a particular SKU. Note: Turn and Earn Index is also commonly referred to as the Turn/Earn Ratio, Turn/Earn Formula, or just as Turn and Earn. This is a simple and straight-forward methodology to help with inventory management, and can help you to evaluate either your inventory as a whole, or a specific segment (or even individual product) in that inventory.

Your Turn and Earn Index is calculated simply by multiplying your gross margin by your inventory turnover (or inventory turns). As an example, if your inventory turns over 10 times in a year, and said inventory has a 40% margin, your Turn and Earn would be 400 (40×10=400). This same formula can also be implemented at the individual product level, simply replace inventory turns with the number of units of that product sold per year.

Calculating Inventory Turns In Excel

Calculating inventory turns in Excel is not an overly complex process either. Traditionally, the way you calculate this figure is to measure how many times the inventory turns over in a year on average. So what exactly are inventory turns? Inventory turns are a measurement of how many times in a time period inventory is sold (this time period is usually one year).

Below we have included two Excel compliant formulas to help you quickly and easily generate your own inventory turn figures.

(($ beginning inventory + purchases over a defined period – ending inventory)/(ending inventory)) x (number of time periods).

(Cost of goods from inventory over 12 months)/(Average inventory investment over 12 months).

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2019-04-16T06:35:13-08:00April 16th, 2019|Pricing Management Software|0 Comments