Return On Investment (GMROI)

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GMROI is the fundamental figure you're interested in. If you invest $X - what will your return/profit be?


By itself, knowing that you sell Vendor Z's items for 3x markup sounds good, but isn't enough information. If it takes an average of 2 years to sell, or if you sell 10 items, but stock 150 then the performance isn't good.


Likewise knowing that you made $10,000  one year isn't enough (not good if you invest an average of $50,000 in that category)


Turn is perhaps a better predictor of success. If you turn a certain vendor 5 times that means you sell a cost value of $10,000 year while keeping an average of just $2,000 in stock. But, if the gross profit is just $1000 it's not fantastic. [plus, the high turn items imply more overhead in terms of stocking and handling the merchandise and sales]



For the GRMOI, Gross Margin Return on Investment, one way to look at it is as an interest rate that you earn.


If you earn 50% PA interest at a bank it means that if you keep, on average a $100 balance, then after a year you would have earned $50 in interest  (and you'd still have your $100 in the bank.)


Same with GMROI.  If you keep $10,000 in a certain category, or vendor's merchandise and get 125% GMROI, then after a year you should have earned $12,500 gross profit - and should still have $10,000 of that merchandise in stock. Here $12,500 is the Gross Return and the average Investment is $10,000.



The trickiest part of the calculation (not that you see it) is calculating average value of inventory that you have maintained in each category over the period of the report.


If you run a report for a time-frame that is not one year, then the sales figures are extrapolated to a year's sales. Don't pick a short time-frame which would lead to inaccurate extrapolations. Six months should be ok.


The formula's are recapped at the end of the report ROI is Gross profit $'s (on a yearly basis) divided by the Average Inventory Level. Yearly turn is Cost of Sales (on a yearly basis) divided by Average Inventory Level.


In terms of the coloring of the result:


Green      = Good GMROI    

You'd like to get over 100% total for the store so the 'noticeably good' areas would have to somewhat higher than then overall goal ]


Red        = Not so good GMROI


You might encounter other guidelines which use a number of 1.0 for a 100% return on investment - but the concept is the same - just a shift of the decimal point.


For the remaining inventory Red        = Not so good (perhaps too much) Orange     = Hmm (perhaps too low)


You can decide if cutoff points are more suitable for your store.