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# Mastering Inventory Profitability // A Step-by-Step GMROI Calculation Guide

Introduction

Calculating Gross Margin Return on Investment (GMROI) is essential for any retailer looking to understand the profitability of their inventory.

GMROI measures how much gross margin a retailer earns for every dollar of inventory they purchase.

By calculating this metric, businesses can make informed decisions about inventory management, pricing strategies, and overall financial health.

Here's a step-by-step guide on how to calculate GMROI using Excel.

Step-by-Step Guide to Calculating GMROI on Excel

Step 1: Gather Your Data

Before you start, ensure you have the following data:

• Net Sales: Total revenue generated from the sale of goods.
• Cost of Goods Sold (COGS): The total cost of purchasing the goods that were sold.
• Average Inventory: The average value of your inventory over a specific period.

Step 2: Calculate Gross Margin

Gross margin is the difference between net sales and COGS.
This value represents the profit made before deducting other expenses.

Formula:

Gross Margin = Net Sales - COGS

In Excel, if Net Sales is in cell A2 and COGS is in cell B2, the formula will be:

=A2 - B2

Step 3: Calculate Average Inventory

Average inventory is typically calculated over a specific period (monthly, quarterly, or annually).
If you have the beginning and ending inventory values, use the following formula:

Formula:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

In Excel, if Beginning Inventory is in cell C2 and Ending Inventory is in cell D2, the formula will be:

=(C2 + D2) / 2

Step 4: Calculate GMROI

GMROI is calculated by dividing the gross margin by the average inventory.
This will give you the return on every dollar invested in inventory.

Formula:

GMROI = Gross Margin / Average Inventory

In Excel, if Gross Margin is in cell E2 and Average Inventory is in cell F2, the formula will be:

=E2 / F2

Example Calculation

Let's say you have the following data:

• Net Sales: \$500,000
• COGS: \$300,000
• Beginning Inventory: \$50,000
• Ending Inventory: \$70,000

• Calculate Gross Margin:
Gross Margin = \$500,000 - \$300,000 = \$200,000

• Calculate Average Inventory:
Average Inventory = (\$50,000 + \$70,000) / 2 = \$60,000

• Calculate GMROI:
GMROI = \$200,000 / \$60,000 = 3.33

This means that for every dollar invested in inventory, the retailer earns \$3.33 in gross margin.
Looking to optimise your inventory management and boost profitability?

At KIVALUE, we specialise in providing tailored analytics solutions that help retailers maximise their GMROI.
Takeaway

Calculating GMROI is a powerful way for retailers to gauge the profitability of their inventory investments.

By following these simple steps in Excel, you can gain valuable insights into your inventory performance, helping you make data-driven decisions to improve sales, manage stock levels, and optimise overall profitability.
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