If you are running a retail business, one of the most important measures of your profit is the gross margin return on investment, which will tell you how much you invested in a particular stock or inventory, and how much profit you were able to derive from the particular inventory investment. Through the gross margin return on investment, you can streamline the retail process to make it more cost effective. Here’s how you can do this.
Percentage of gross profit margin. Subtract the expenses for the goods that were sold from the amount of the sales in the inventory. This should give you the gross profit margin. Next, you will need to divide the total profit margin against the sum of sales for the time period covered on the gross margin ROI that you are computing for. This will give you the percentage for the gross profit margin.
Cost of inventory average. Once you have these figures, you will be able to compute for the average costs for the inventory or stocks that you have. Included in this list are the cost of the materials that were sold, the processing cost, the labor cost, and the shipping and other transportation expenses. These items should be included from the opening inventory down to the closing inventory. Once you have computed for the cost of inventory average for the opening inventory and the closing inventory, the next step is for you to add the tw3o together and divide them by two, to get the average.
Divide. Next, you will need to get the estimated ratio for the total sales to inventory. This can be done by dividing the sales against the average of the cost of the inventory.
Percentage. To finally get the percentage, you should take the percentage of gross profit margin and use it to divide the estimated ratio for the total sales to inventory. This will give you with the gross margin return on investment in terms of percentage. Generally, the higher your percentage, the better is your profit yield from the inventory.
Calculate for the gross margin ROI in dollars. To get the dollar value for the percentage that you have just computed, you will need to divide the gross profit margin against the average inventory cost. The resulting figure will tell you how much you have earned in dollars for each dollar that you have put into the inventory as an investment.
Using the percentages. Once you have these percentages, you can use it as a comparison for assessing whether the company or firm has shown improvements, or whether you need to undertake some cost cutting measures to retain the competitiveness of the company. With these figures, you can determine whether you will need to outsource the materials for your production line from cheaper resources, or whatever cost efficiency programs you need to boost the profit ration for your inventory.
Succeeding in business requires you to be alert not only on how many goods you sell, but also on how much profit returns to you for all of your investments. Through the GMROI, you should be able to get accurate figures on how much profit you have made.