Cell phone resellers stock depreciating assets (phones decrease in value over time), which motivates them to sell their inventory as quickly as possible. Pursuing quick sales is also a smart business strategy for any high-volume, low-margin business. But just how high volume is your business? That’s what inventory turnover will tell you.
Let’s define inventory turnover: It is the number of times all devices in stock are sold over a given period, anywhere from a day to a year. Understanding inventory turns provides guidance on how frequently you’ll need to restock, and how soon you’ll have funds available for the next round of wholesale purchases.
Inventory turnover is calculated as the cost of goods sold (COGS) divided by the average value of inventory. The average value of inventory is simply beginning inventory plus ending inventory divided by two.
Example of Inventory Turnover
For a deeper understanding of inventory turnover, let’s walk through a practical example for a cell phone reseller.
- Bob’s Phone Store buys $450,000 worth of devices every two weeks. He sells his inventory for $500,000, giving him $50,000 of profit.
- Since his buying and selling cycle takes two weeks, he operates two cycles a month, for a monthly profit of $100,000.
- To calculate his average monthly inventory, we take his starting inventory of $450K + his ending inventory of $450K and divide by 2, to equal $450K.
- Now we can determine his inventory turns. His COGS is $900,000 a month. We divide COGS by average inventory. $900K/$450K = 2 inventory turns a month.
Bob turned his inventory twice in a month, at a 10% profit margin, which is mathematically the same as selling his inventory once a month at a 20% margin. Which is the better business practice? Are more turns better?
Your Goal: More Inventory Turns
For phone resellers with low-margin, depreciating stock, it’s safer to have more turns—that gives your devices less time to decline in value and allows you to sell them at more competitive prices (not allowing for much depreciation time). More turns also improve cash flow, as your capital doesn’t spend as much time locked into stock, and you don’t need to set aside as much capital to make purchases. The key to being able to make more inventory turns is to have a steady supply of well-graded wholesale phones.
Keep an Eye on Daily Turns
In the example of Bob’s store, we used a monthly calculation of inventory turnover. For an even more detailed view of the risk the business is carrying, measure turns on a daily basis.
Now that you understand the importance of quick inventory turnover, it’s a good idea to consider building a relationship with a reliable wholesale phone supplier who can rapidly get you the stock you need.
Wondering where to start? Here’s what to look for when buying wholesale phones.
