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What is GIMROI you say?


In an earlier article I talked about understanding key drivers of profitable performance and working capital management for your business.

Inventory is likely a major, if not the major, ongoing working capital asset of your business.

If you don't have inventory, then you don't have product to sell and can't generate margin to pay expenses and make a profit.

Likewise inventory costs money to carry:

  • bank debt / overdraft finance costs
  • owners capital tied up in the business that perhaps could be deployed elsewhere
  • suppliers trade arrangements

So managing your inventory, its level, the number of times it turns over in a year and the margin you generate there from are all critical to success.

If it costs more to hold the inventory than you generate from it, then maybe you shouldn't have that line, or have less of it, or be more careful about what times of the year you carry it.

GIMROI is a management assessment tool to assist identifying inventory items not providing adequate return on investment and thus providing an opportunity to improve profit outcomes.

With modern accounting software and spreadsheets it is relatively easy to implement and then determine GIMROI by stock line and look for improvement opportunities (increase margin, decrease holdings, increase activity, etc).

How does it work in practice (by way of examples):

Inventory Item A

  COST $950  
  SALE PRICE $1000  
  MARGIN $50 per unit 

Average stock holding across year

6 units @ $950 = $5700

If 6 sold a year (i.e. effectively one stock turn) then $300 margin on $5700 average investment equals 5.2% return on investment which is likely to be less than the cost of bank debt or opportunity for owner capital elsewhere.

If 24 sold per year (i.e. effectively 4 stock turns) then $1200 margin on $5700 average investment equals 21.1% returns on investment. 

I would take this as a solid return.

Inventory Item B

  COST $350
  MARGIN $50 per unit

Noting the same dollar margin per unit as Item A. Average stock holding across year 6 units @ $350 = $2100.

If sell 6 units then GIMROI equals 14.3%.

If sell 24 units then GIMROI equals 57.1%.

14.3% is probably okay but low, 57.1% is very positive.

Of course all of the analysis in the world is wonderful – some items just need to be carried to have the right mix to satisfy your customers, an item may well help differentiate you from a competitor.

As always don't just accept the data or analysis, but do work with it to help make decisions – improving your GIMROI should improve your profit and working capital management – better for you, your bank and your opportunities.

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