These days, independent retailers cannot afford one iota of excess inventory. Storage costs, insurance, pilferage, damage, obsolescence, taxes and interest on loans add up to 30 percent annually to the cost of the goods you carry. Because those costs continue to rise, tight inventory control is still one of the best investments you can make - especially during the buying season.

If your store is like most retail stores, it's probably overstocked most of the time. This excess inventory is like excess fat: It looks bad, consumes energy the inventory "muscle" needs and threatens the financial health of your business.

If you'd like to time your inventory flow so you always have fresh merchandise and a healthy turnover rate, consider the following shape-up plan. It will help trim away excess inventory without cutting into the muscle of your stock.

What is Your Ideal Turnover Rate?

Inventory turnover is the theoretical measure of how often, at the current rate of sales, you sell your entire inventory in one year. We say theoretical because merchandise sells at different rates. (To calculate inventory turnover, divide total annual sales by your average monthly inventory at retail.)

An inventory turnover rate doesn't just happen - or at least it shouldn't. You can choose, within reason, the turnover rate you want to achieve. Low turnover ties up your capital and lessens your gross profit. To get the most out of your inventory, settle on a turnover rate that balances your customers' needs for selection and service with your need to maintain a solid return on investment.

One way to get an idea of your store's optimum turnover rate, track the rate over a period of time. Is your merchandise turning faster or slower than it was this time last year? Another way to assess your turnover rate is to compare it to that of other stores in your industry.

How Do You Achieve the Ideal?

The essence of an inventory control program is planning your stock levels more stringently by using weeks-of-supply inventory maxims. The goal: NO EXCESS INVENTORY.

Here are the steps:

Step 1.
Determine the turnover figure your business.

Step 2.
Divide 52 by the turnover rate you determined in Step 1 to get the number of weeks representing one turn. This is called your selling period.

Step 3.
Project the sales for one selling period (calculated in Step 2). This sales figure represents the precise level of inventory you should have on hand to begin your next selling period.

Step 4.
Achieve and maintain that level. If you have excess inventory, take swift measures to eliminate it.

Step 5.
Repeat Steps 1-4 no less than monthly!

We've already discussed in Step 1 how to determine the turnover rate your business should have. Once you find the rate you want to maintain, you can convert it to weeks of supply (Step 2). For instance, if you find you should have two turns per year, you need to have a six-month -- or 24-week -- supply of inventory on hand at all times. But no more than that!

How do you know how much inventory you'll need for one selling period? By realistically projecting your sales (Step 3). Due to holidays and other factors, projected sales for each selling period will vary throughout the year. To estimate sales, analyze last year's take, recent receipts, trends in your community (as well as the entire industry) and your total merchandising plan. Be sure to take into account the uncertain economic climate and remember to allow for recessionary factors.

By the time you reach Step 4, you should have a good rule-of-thumb figure for your store's ideal level of inventory. If your current level of inventory is more than you need for one selling period, get rid of the excess. Streamline your assortments. Return all substitutions and unauthorized shipments. Investigate controls to ensure that no orders are accepted after their cancellation dates. If necessary, mark down old merchandise.

Set Turnover Goals

Here's an example to help you visualize how this process works in practice. Assume you project a total sales volume of $700,000 for next year. What inventory level should you maintain to keep in line with your sales and inventory targets?

Suppose you set three turns as your goal for next year. Dividing 52 by 3, you find you should sell out your inventory approximately every 17 weeks. That equals one turn.

Further assume you expect sales to be $250,000 for the first 17 weeks of next year. That means you should have $250,000 worth of inventory on hand at the first of January.

By contrast, let's say you're planning inventory levels for the last 17 weeks of next year. Because that period includes the holidays, you anticipate $450,000 worth of sales during those weeks. You should enter that period with $450,000 worth of inventory on hand. During that time, you will gradually sell down from $450,000 to $250,000, always maintaining the inventory level equal to your sales projections for the next 17 weeks.

The key to this whole process is projecting your sales week by week. Then, at any point in the year, you can look at your sales projections for the next turnover period (in this example, 17 weeks) to determine how your actual inventory compares with your optimum inventory.

The more you compare these figures, the smaller the variations will be and the easier they will be to adjust.

In all these examples, we've treated your store's inventory as a whole. However, you can and should apply these steps to each department or inventory classification within your store. You can't realistically expect to turn a trendy product at the same rate as you do a classic, so set turnover goals for each category. Combine those results to come up with the desired turnover rate for the entire store.

Maintain the Balance

Retailing is a delicate balance between merchandise and cash. Independent retailers usually must take one of two risks: commit themselves to large quantities of inventory and possibly end up with an excess, or commit to less and later find goods unavailable. Given the current economic situation, it's probably better to go with the second risk.

If you hold inventory in proportion to your projected sales for the weeks of supply, you will have a greater share of fresh merchandise. In addition, timing the inflow of merchandise as closely as possible to the start of the selling season will, in most cases, be more profitable than taking goods far in advance, even if vendors grant dating or other price concessions. The other costs of carrying inventory will almost always wipe out whatever savings you realize by taking goods early.

Inventory control requires disciplined effort. It takes work to maintain a steady flow of fresh merchandise while keeping stock quantities proportionate to your ideal turnover rate. But if you do shape up your inventory turnover rate, it will improve your income statement, balance sheet and your bottom line. And that's a program worth doing!