What is GMROI anyhow?
So they tell me I should keep an eye on GMROI. What is GMROI anyhow? Not another dumb report that does not tell me anything?
Actually the entire retail world studies their GMROI reports. It is the only way to know if your inventory is doing what you hired it to do. GMROI measures how well you are handling inventory and how much money it is making to you. If you are like most retailers you only look at how much money you made when you sold an item. And that is not the most important number!
Let’s say you buy 100 T-shirts from Ted’s Tie-Dye Tee Company at a cost of $10 each and you intend to sell them for $2,250 or $22.50 each. You bought 100 so you’ve invested $1,000 with Ted’s.
Let’s say you sell 30 shirts. Did you make profit? Yes. These 30 cost you $10 x 30 = $300 and you sold them $22.50 each making total revenue of $675. So you made $375.
But do you have any money? The answer is NO! You did make profit but you had to pay Ted’s $1,000 and only took in $675.
So you made money but have none. That’s GMROI. If this had been one full year then you should have stocked only 30 shirts not 100. Then you would have made money and also HAD money.
So instead of looking at Gross Profit Per Sale you should be looking at three numbers, not just one:
Gross Profit dollars
Average inventory during the year
Turn, how often the item sells in a year
These three numbers make up GMROI.
So GMROI tells us how much money we are making or losing on ALL inventory. That means we look at the money from all the items that sold plus the “loss” we had from items that didn’t sell.