As a retailer or spa owner, you invest your money in inventory that will bring in sales and earn yourself a fair profit. Your investment in Candles of Eden and other quality products are your way of furthering your business so that it remains a going concern for a long time. It’s wise to take the time every so often to make sure each merchandise department and classification in your operation is giving you a good return for every dollar invested.

You have to look at what accountants call “opportunity cost”. You have decided to invest your money in a store or spa instead of or along with mutual funds, stocks, or the bank. The point being you are forgoing other investment “opportunities” because you have chosen to invest in inventory that you hope will earn you a profit. You can find out if each inventory department or classification is earning you a good return by calculating your Gross Margin Return on Inventory Investment or GMROII.

GMROII lets you know how much you are getting back in return for every dollar you invest in inventory. Some retail analysts believe that if you receive less than three dollars back on a one-dollar investment you are not getting enough return on that investment. Remember, when you invest in a business and buy inventory you are tying up money you could have invested elsewhere. You have to make sure your inventory is netting you a good return.

If you receive one dollar back for a dollar invested you haven not gained anything. You may as well hand someone a dollar bill and then ask him or her to give it back to you. If you receive two dollars back on a one-dollar investment you have made a profit, but it’s probably only enough to cover those payments you need to make to keep your business operating. That means wages, rent, taxes, heat, hydro, maintenance costs, and the like. If you receive three dollars and hopefully more on every dollar invested in inventory, then you have money to pay for the inventory, operating expenses, and then money left over for you in the form of pure profit.

You calculate GMROII by taking your “Gross Margin in Dollars” and dividing it by your “Average Inventory at Cost”. You can calculate the GMROII for an entire department such as your giftware department that may include SoyLuscious® Soy Candles and other elegant products. Total up the gross margin in dollars that you have calculated for that department and then divide it by the average inventory at cost for that department. If your gross margin in dollars is $55,000, and the average inventory at cost in a department that will produce that margin is $15,000, then you will see a $3.66 return on every dollar of inventory investment. You can calculate GMROII for you whole store, a department, or a classification.

Calculating your GMROII shows you what department or classification is giving you the greatest return. You can then focus your advertising and promotion activities on those departments and classifications. Candles of Eden and other profitable product lines that net you a good return can be promoted and other lines that offer little margin can be discontinued. Remember, along with your money, you invest time and energy into promoting your inventory. You need to get those good returns.

Look at GMROII each month for different departments and merchandise classifications. You can ask your accountant to help you keep track of this figure if you do not want to calculate your average inventory at cost and gross margin in dollars on a regular basis. GMROII will help you see how much you are getting back per dollar of inventory investment and will help you make sure you are getting the return you need from your investment in inventory “opportunities.” We here at Candles of Eden offer you the opportunity to invest in our quality SoyLuscious® Soy Candles that will bring you the profit returns you need to grow your business.