Stock-to-sales ratios is an effective tool for managing inventory to ensure ideal stocking levels are consistently maintained so there is enough merchandise available to meet customer demand without being overstocked. Stock to Sales is a measure of how well inventory levels match actual sales and can be calculated using the following formula:
Beginning of month inventory value / Current month sales=Stock-to-Sales Ratio
If the beginning of month inventory value is 4000 in retail dollars and retail sales for the month total $1000 then $4000/$1000 = 4 resulting in a sales-to-stock ratio of 4 to 1.
Ideally stock-to-sales should be three to one or four to one which is large enough to accommodate increasing sales, while maintaining a sufficient and fresh supply of inventory to meet customer demand and maintain adequate cash flow.
Typically stock-to-sales ratios above five indicates high levels of on hand inventory which may restrict available cash flow, consequently sales-to-stock ratios below three may pose out of stock risks and translate into lost sales and possibly lost customers.
Analyze stock-to-sales ratios at the store level, merchandise sort level, and item level in an effort to prevent overbuying/under buying any one type of merchandise.
Seasonal merchandise requires a different approach for achieving optimal stock- to-sales ratios. Early in the season the ratio will be high due to incoming merchandise in advance of the selling season, as the selling season draws to a close the stock to sales ratio should approach one to one.
Stock-to-sales ratio should be considered an evolving number rather than a fixed number due to busy and slow times meaning stock to sales ratio should be analyzed over a meaningful periods of times like a month, quarter or season.
