High Margins slowed inventory turnover, tying up cash

Challenge

An independent retailer came to us contemplating some sku rationalization and hoping to improve cash flow.

There was also hope that the overwhelming amount of data from Square could be better utilized: combined with many other channels beyond Square and analyzed outside of QuickBooks keeping the volume of accounting data manageable.

Approach

We focused on calculating product margins first, expecting leaks.

The detailed cost history lived in two years of paper supplier invoices so we quickly scanned and digitally captured the item level data.

We mapped this to the imported channel sales data including Square, sometimes using recipes (aka BOMs or assemblies) to tie back to item level costs. Some physical cycle counts for slow moving items were also factored in.

Outcome

Margin wasn't the problem. Sell-through was.

SKU level margins actually came out high. After some research we found a nearby competitor was cheaper on some staples. Customers confessed they noticed, hurting traffic. Also a lot of cash was sitting on the shelves, in stock already paid for but not yet sold.

We recommended pricing "Known Value Items" (staples) more competitively, adding more affordable product options to drive traffic, and introducing digitally promoted markdowns for clearance of older stock.

The management team also worked on some great initiatives to get fixed cost to revenue ratios down.

What we learned

A small (sufficent) margin that's collected frequent enough beats a large margin collected rarely. Also, fixed costs (e.g. rent, utilities, equipment leases) need to be kept proportionate to Revenue and Gross Margin.