While inventory has been thoroughly covered in a previous chapter, some of the concepts apply directly to evaluating performance and maximizing a spa’s proﬁts.
a. Inventory Values
Spa management should look at the inventory value each month and monitor closely trends in the inventory value as they relate to the previous month and to the same month in previous years.
At the Urban Spa…
Mae poured herself a cup of tea and watched as Reuben ﬂipped through the sales ﬁgures and thought about what they had been discussing. She winced slightly as she saw his shoulders and neck tighten up.
“Mae,” he said ﬁnally, “I feel like I’m in a no-win situation here. Remember that bridal shower? Nearly all of them wanted to purchase the ginger root facial mask. Only half of them were able to because we were then out of inventory. It’s one of our most popular items and I’ve wanted to increase how much we carry in the past. However, you keep telling me that there aren’t enough inventory dollars available to increase our purchases.”
Mae sipped her tea and nodded. “That’s true, Reuben. For those answers, you’re going to have to look beyond the statement of income summary. Take a look at the retail inventory report on the balance sheet in the blue folder.” She paused as he opened up the folder.
“Remember,” she continued, “there is only a 10 percent chance that merchandise that is 90 days old will sell for full price. Let’s look at your inventory. In 2001, you purchased some commemorative shirts honoring the brave souls of the World Trade Center tragedy. Here we are in 2005 and several haven’t sold yet. Our inventory is way too high and we’ve got dollars tied up in items that aren’t selling. If you want those to move, you’re going to have to discount them.”
“But if I discount them,” Reuben objected, “I’m going to increase my cost of goods sold even further.”
“That’s true,” Mae agreed. “At least until those items are moved out. However, until you do you also will not be able to buy those ginger root masks you need, which would ultimately improve the overall proﬁtability of the spa’s retail.”
b. Inventory Counts
In traditional retail, it is customary to conduct full physical inventories of retail merchandise annually, semi-annually, or quarterly. In the hospitality industry, it is the practice to conduct complete physical inventories on a monthly basis. The hospitality industry has been heavily inﬂuenced by food and beverage, which requires monthly inventories to control costs.
From an evaluation perspective, the more frequently inventories are counted, the better the information available for management decision making. If a spa retail department takes a physical inventory only once a quarter for example, the spa accountant will either use the cost of sales percentage for the previous months or year to date and book that amount as the expense for the month, or, if there is a budgeted cost of sales, he or she may choose to use that number. Then when the physical inventory is taken, the amount reported on the balance sheet will be adjusted to the actual inventory value, which may cause a signiﬁcant swing in cost of sales reported for that month. It is now far more difficult to research the cause of any problems because of the number of transactions that have occurred is so much larger.
If the cost of sales has remained very consistent over a long period of time, a spa may be able to conduct physical inventories infrequently and rely on cycle counts as a way to monitor inventory accuracy. However, spas that have experienced signiﬁcant swings in the reported cost of sales—any swing greater than 3 percent—will want to conduct physical inventories more frequently.
c. Days of Inventory on Hand
Inventory turnover, as discussed in the inventory management chapter, is an important statistic in running a proﬁtable retail operation. However, sometimes it is easier to think in terms of how many days of inventory is on hand. This is a method the automotive industry commonly uses. Manufacturers will sometimes report that they have 83 days of cars in inventory and will thus begin reducing manufacturing hours or reducing plant production.
Days of inventory on hand is calculated by taking the value of the inventory and dividing it by the average daily retail sales.