This article, by Carl Wolf, was published in Marina Dock Age – April 2015
Some would say that a marine store at your marina is a core part of your business. It might be, but how well do you know how if your inventory is selling? Stepping back, let’s look at the basics of understanding the dynamics of an inventory.
First, understand who is going to be buying your marine products. Are they boaters who dock or store their boat at your marina? Is your marine store the only one in the area? Will other boaters come from other marinas or boatyards? Does your marine store have nautical gifts which could attract a larger segment of the population? Does your marine store have a seasonality or slow season to it?
Regardless of what segment of the market you are catering to, price your merchandise so that it sells out by the end of the season, if you expect to realize a profit. Pricing has a direct correlation to your inventory turnover. Do not sit on merchandise that is either obsolete or is about to become obsolete. If the end of your season is approaching, discount your merchandise so it sells. Obsolete inventory is only going to go down in value the longer you hold on to it.
Boating merchandise fits one of two categories: perennial staples, such as bottom paints, cleaners and mooring lines; and trends or fads. For these, stay updated by using your suppliers as barometers to understand the boating market trends, especially trends that are fading.
The inventory turnover is a measure of the number of times inventory is sold in a time period, such as a boating season. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. At a minimum, you should be able to turn your inventory at least twice a year.
The inventory turnover ratio is a key measure for evaluating just how efficient your marina is at managing the company’s inventory and generating sales from it. Usually, a higher inventory turnover ratio is preferred, as it indicates that more sales are being generated given a certain amount of inventory. Turnover ratios you should aim for at your marina:
Target turning over your inventory three to four times per year.
Minimum inventory should be turned at least two times per year.
Your inventory becomes obsolete if it has not turned over at least once per season.
Break your inventory down into segments of like type items. For example:
- Fuel - gas and diesel;
- Parts - spark plugs, propellers, and gaskets;
- Marine supplies: cleaners, paints and hardware;
- Groceries: beverages, snacks and ice.
Be careful not to be skewed by a high turnover of one segment of your inventory. You can have a high turnover of fuel, but some engine parts may be on the shelf for more than a year. When you combine a fast turnover item like fuel with a slow moving item, it will skew your results and lull you into believing you are doing better than you really are.
Let me ask you “What do you consider to be obsolete inventory?” We consider inventory items to be obsolete if:
- The items have not turned over at least once in the year.
- The items remains in stock after the boating season has ended. For example, marinas in northern waters still have anti-freeze and/or shrink-wrap in inventory after the boating season has ended.
- The date on an item has expired, such as flares and perishable beverage/food items.
In financial accounting, the term inventory shrinkage (sometimes truncated to shrink) is the loss of products between the time of purchase from supplier/vendor and the point of sale. Shrinkage can be attributed to employee theft; shoplifting; administrative errors; improper supplier controls; cashier errors; items damaged in the marine store, and perishable goods not sold within their shelf life. Shrinkage affects your profitability, as it relates to the difference in the amount of profit your marina will generate.
Funds and Taxes
If your inventory is not moving, your profit and loss statement will reflect it. As you review your balance sheet, you will see how much of your working capital is tied up in carrying slow moving inventory. Inventory sitting on the shelves at the end of the year is susceptible to year-end taxes in many states.
Be cognizant of the dynamics of your inventory. Review your inventory controls policy on a regular basis. Test the inventory and create safeguards as needed. There will be a day of reckoning. That day may be at the end of a calendar year, as your marina is being re-financed or worse yet, the day you put your marina on the market. The controls you have in place concerning how your inventory is managed will have an impact on the marina’s bottom line. The controls can mean the difference between having a profitable year or not.