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JULY 11,
THE MUSIC TRADE
1925
REVIEW
Turnover and Its Relation to the Net
Profit in the Music Store
H. S. Carroll, Before the Western Music Trades Convention, Declares That Pianos Show a Turnover of
Two, Talking Machines of Two and One-Half, Records and Rolls of Two, and Sheet
Music of Two and One-Half—The Proper Method of Figuring the Turnover
T is but a short interval in time, a little over
fifty years, since merchandising had no sell-
ing price, and the most persistent haggler
bought the goods far below the unwary. When
merchandise was bartered for groceries, coal,
etc., and the large department store of to-day
was little dreamed of. What an evolution has
occurred in merchandising, in merchandising
ideas, in marketing and in merchandising princi-
ples. To-day, merchants are analyzing their
business, and one of the principle topics of the
day is that of turnover.
Turnover has a vital bearing on profits, but
in spite of this fact we find there are many
merchants (or within large department stores,
department managers) who do not really under-
stand the meaning of turnover. Being a pub-
licity director, and not an accountant, I have
taken the liberty of gathering my data for this
article from authoritative sources.
What Is Turnover?
A very simple question and yet not quite so
easy to understand, for the simple reason that
many merchants view turnover from a different
angle. A friend of mine in talking to a certain
merchant on the subject of turnover, was told
that the merchant's stock had turned a surpris-
ingly number of times. When asked how he
arrived at the figures this merchant said: "Why
my stock at the beginning of the year was
$7,000—at the end of the year it was $7,600, or
$14,600 in all; dividing by two, the average
stock was $7,300; my sales were $44,000, so the
stock turned six times."
In reality he had turned it two and a half
times!
Many merchants confuse the term "stock
turnover" with "capital turnover." From all I
can learn, the modern way of calculating turn-
over is:
First. By dividing the average stock at re-
tail for a given period into the sales at retail
for the same period.
Second. By dividing the average stock at cost
for a given period into the sales at cost for the
same period.
An Example
No. 1 (Turnover at retail)
I
Average stock at retail $100,000 Inventory
Actual sales at retail 400,000
$100,000 )$400,000 (4 times turnover
No. 2 (Turnover at cost)
Actual sales at cost $240,000
Average stock at cost
60,000
$60,000 ) $240,000 (4 times turnover
Both methods give practically the same re-
sults. However, the method of figuring turn-
over on average retail is recommended by the
National Retail Dry Goods Association,., and
practically all department stores are keeping
their records on a retail plan, i. e., they report
all purchases and sales at both cost and selling,
enabling them at all times to strike an inven-
tory, without the necessity of making a physical
check.
Example
Stock on hand at end of month:
Jan
$7,000
Feb
8,000
Mar
8,500
3 )23,S00
7,833.33
Sales for 3 months: $6,000
$7,833 )6,000.00 (0.76 in 3 months
This is better than 3 times a year
To begin with, a merchant has capital, or
the necessary credit, with which to finance his
purchases, and yet the merchant who can show
that he can turn his stock ten times a year,
needs only one-fifth of the capital required by
the merchant who can turn his stock twice.
Therefore, to-day the successful merchant fig-
ures his turnover in advance. He estimates the
volume of business he expects to do and re-
duces this volume to cost and divides it by the
capital which he has available.
Example
Estimated sales at retail
.$100,000
Your capital
30,000
Your cost retail
60,000
$30,000 )$60,000 (2 times turnover of stock
to get expected volume from your capital.
It is important, therefore, that he set his
turnover at a reasonable figure, one which he
would expect to accomplish.
Turnover in Eastern cities is higher than it
is in the West, from statistics furnished by the
Federal Reserve. This is due to the fact that
we are further from the market, necessitating
the anticipation of our requirements over a
longer period! The following Federal Reserve
figures show the approximate turnover of the
music trade:
Talking machines, two and one-half times.
Record and rolls, two times.
Pianos and piano players, two times.
Sheet music, two and one-half times.
The entrance of radio into the music field has
undoubtedly changed these turnover figures
considerably, particularly on records and talk-
ing machines.
Frequency of Inventory
The oftener an inventory figure is available,
the more correct will be the average. For ex-
ample, the average for a year for the inventory
taken monthly, will be more accurate than an
inventory taken once a year.
When an inventory is taken but once a year,
it is taken at a time when stocks are lowest;
therefore, when the two inventories are com-
pared, the average does not represent the true
facts; whereas a once-a-month inventory,—-
thirteen inventories will be available which
really strike the true average.
Even bankers are recognizing the importance
of turnover as evidenced by the following an-
nouncement made in the Federal Reserve Bul-
letin of May:
"The rate at which stocks of merchandise are
sold and replenished is an important factor af-
fecting the expenses of operating retail firms
and in determining the amount of credit that
is required to finance retail trade. In view of
the importance of this relationship between
stocks and sales, the Federal Reserve Banks
and the Comptrollers' Congress of the Retail
Dry Goods Association, decided to add to the
regular retail reports, data showing the rate of
turnover each month and the cumulative rate
from the beginning of the year through the
current month."
What Is It That Affects Turnover?
The even flow of merchandise from its source,
through the factory, jobber and retailer to the
consumer, is like the flowing river that winds
its way from source to mouth in a steady even
stream.
There may be back-eddies to make stagnant
pools in the river, slow selling merchandise
that does not turn rapidly, causing the stag-
nant pools of losing profits.
Turnover is affected by poor selection of mer-
chandise, by errors in quantity purchasing, by
an over-balanced stock, and by carrying too
many price lines.
It is not always possible to sell all the mer-
chandise we select, but once we discover that
we have made a mistake and that our purchases
are wrong, then we must take instant action,
for the longer this dead merchandise remains,
the more costly it becomes. A dollar line of
merchandise on the shelf that hangs on year
after year, had better be turned into a nimble
dime that will continue to • turn.
Because one merchant is capable of purchas-
ing a large quantity of merchandise, thereby
securing a low price, it does not follow that all
merchants can do likewise.
It is important, therefore, that you know
your clientele, and how much of a quantity you
are capable of absorbing; otherwise you may
tie up your capital in a purchase that will pre-
vent you from buying sufficient of current
quick-selling numbers.
Balanced Stocks
Stocks that are poorly balanced may mean
that one portion of your stock is turning rap-
idly, while the other is tied up in high-priced
merchandise that remains frozen and affects the
turnover.
I remember a store having $30,000 worth
of diamonds, which the buyer thought would
add prestige to his jewelry department. It
may have added the prestige all right, but it
cut down his purchasing power, affected his
turnover, profit, and after three years of carry-
ing them without sufficient turnover, they were
finally disposed of at half price. Seems foolish,
doesn't it, to sell diamonds at half price? Yet
it proved a wise thing to do, because it turned
dead capital into active merchandise that began
to turn and make profit.
Recently stores are discovering that capital
can be spread too thin over too many price
lines and that this will eventually affect the
turnover. It is better, therefore, to concentrate
on a certain number of prices that can be deter-
mined upon and stay within these price lines.
Many stores carry such prices as $1, $1.15,
$1.25, $1.35, etc., in practically the same class
of merchandise. By creating price lines within
such narrow limits, the merchant is making un-
necessary outlay of capital, for the assortment
must be complete in every price.
From a reliable source, I have been given
the following figures as to volume of business,
turnover, and marking ratio of six of the large
retail department stores in America for the year
1920.
Store
A
B
C
D
E
F
Volume
600,000
100,000
80,000
500,000
1,000,000
21,000
Turnover
3.4
2.7
3.1
7.7
4.3
4.8
Mark-Up
46
40.3
40.6
35
36
47
The average turnover for large department
stores in the West, ranges from 3 to 4 per cent
—that is, taking the store as a whole. In
glancing through the turnovers in various de-
partments throughout the store, we find that
they range from 1.87 for departments like laces,
co about four for furniture, seven for millinery
and as high as nine for garments.