Maximalize the return rate from your inventory with Calcopolis.
Table of Contents
Inventory is one of the biggest investments for any retailer. Gross Margin Return on Investment, also known as GMROI, is a formula that we use to evaluate your success in getting a return on your inventory.
In other words, it shows how much profit you gain when you invest a dollar. The problem is that calculating GMROI can be a hassle for many people.
However, with the help of our gross margin return on investment calculator, you’ll be able to do it in no time.
What Is GMROI?
GMROI is a metric to evaluate the profitability of every dollar you invest in your inventory. Generally, GMROI analyzes the business’s ability to turn inventory into cash while considering the inventory cost.
GMROI is basically ROI applied to the context of invetory management.
Who Can Use GMROI?
GMROI is an essential metric. It can help any manager understand the average amount of inventory returns above its cost.
Typically, GMROI applies to any type of store or merchandise classification within a retail store. Here are some examples of industries where you can apply GMROI:
- Furniture retailers
- Apparel retailers
- Recreation retailers
- Health and beauty retailers
How to Calculate GMROI?
To calculate GMROI, we need to figure out two metrics: the gross profit and the average inventory cost.
First, we calculate the gross profit using this formula: gross profit = revenue – the cost of goods sold (COGS)
Generally, it accounts for variable costs, like labor and supplies.
Second, we calculate the average inventory cost, which is basically the average of the beginning and ending inventory.
After figuring out the gross profit and the average inventory cost, you can now calculate GMROI using this formula:
GMROI = gross profit / average inventory cost
If you’re having trouble calculating GMROI, you can check out the following example:
Let’s assume there’s a company with a gross profit of $250,000 and an average inventory cost of $50,000.
In that case, GMROI = gross profit / average inventory cost = $300,000 / $100,000 = $3. That means the business makes $3 in gross profit for every dollar it spends on the inventory. In other words, the business earns 300% of gross profits over the inventory costs.
Are you still having trouble with the calculations? Calcopolis has many helpful tools you can use!
What Is an Acceptable GMROI Value?
Generally, a GMROI with a value higher than one means that the business profits from the inventory. The higher the value, the more profit the company makes.
Further, a good GMROI can vary between different industries.
For example, a positive GMROI value for an apparel retailer is anywhere between $1.5 to $3. On the other hand, in the recreation industry, a GMROI of around $1.5 to $2.5 is fine.
How to Increase Your Company’s GMROI
To increase the GMROI of your business, you can improve the gross profit or improve the inventory turnover. Let me tell you how you can do so.
Increasing the prices of your items can eventually improve your GMROI. However, it’s not as simple as that. If you set the price too high, your sales will go down, and the GMROI will decrease.
Cut Some Inventory Costs
Generally, cutting inventory costs is key to increasing GMROI. You can cut your inventory costs by using more advanced strategies.
For example, you can re-evaluate your safety stock. Additionally, you can improve your data and your inventory management. Further, automation is essential to cut some costs and implement new methods.
Work on Your Forecast Accuracy
Improving your business forecast accuracy can eventually increase your GMROI. That’s because businesses that can accurately forecast future demand can make better sales and higher GMROI.
There are many ways you can improve your business forecast. For starters, you can work more on predicting all the outcomes with scenario planning. Additionally, you can analyze the performance of your competitors.
Days Inventory Outstanding (DIO) vs. GMROI
Days Inventory Outstanding (DIO) is a ratio that measures the average number of days the business holds the inventory before turning it into sales.
The lower the DIO value, the shorter the profit period is tied up in inventory. Therefore, it’s a liquidity metric that also indicates the business’s operational and financial efficiency.
On the other hand, GMROI is an inventory profitability ratio that shows the business’s ability to turn inventory into cash.
If you wish to analyze how your company utilizes its assts in the broader context check out our Return on Assets Calculator.