Inventory Management Part III: Turnover

This is part three of my Inventory Management series.

Two weeks ago, I led with an introduction talking about the purpose of inventory as well as some common mistakes. In short, inventory is there to support your sales which is how you make money.

Last week, I talked about tracking your inventory and calculating your return on assets. This is how you can tell if your Magic finance endeavor is even worth it.

Today we’re talking inventory turnover. I said that you carry inventory to support sales, and this metric will tell you how well you are doing it. It’s the heart of inventory management. Carefully monitoring your inventory turnover is critical and it will save you money and guide your purchasing decisions.

Tell Us How It Works

Inventory turnover is a simple formula:

Inventory Turnover = Cost of Goods Sold / Average Inventory

We haven’t used the term “cost of goods sold” exactly before, but it is what it sounds like: your cost on the cards you sold. It’s not your total sales. It’s the cost at which you were carrying the cards in inventory. In part two, we briefly discussed how to calculate average inventory, which is the denominator here.

Okay, a very simple example to make sure we are on the same page. Let’s say I carry about $1,000 worth of inventory and that is constant throughout the year. I sold $2,000 worth of cards this year (that’s my cost, the actual sales would be higher because I am selling for more than I paid), so my total inventory turnover is ($2,000 / $1,000) or 2.0.

One way to say it would be that inventory turnover is the number of times you sell through your inventory in a given time period (often a year but sometimes you will see monthly numbers). Of course, it doesn’t literally mean I sold through my inventory twice because it’s an average of all my items. In every case, there will be some items that sell very well and turn more than the average and some items that sell slowly or don’t sell at all.

When it comes to inventory turnover, generally higher is better. Why? Because a faster turning inventory reduces the amount of money you have to tie up to maintain your sales. That means lower costs. Lower costs means higher profit. You may not want to push it to extreme levels, though, because very high inventory turnover usually means frequent stockouts and lost sales. This mostly applies to stores with repeat customers, but even speculators should consider lost sales. Dumping your entire inventory after a pro tour is great (and helps inventory turnover), but it leaves you with a period of zero sales until you get stocked up again.

What’s Good?

It’s going to vary depending on your setup. If you own a brick-and-mortar store, you will probably be forced into carrying a larger selection of cards, which makes turning your inventory harder. Your customers will depend on you when they are looking for singles, and this means you will carry things that don’t turn well to support them. It’s worth it if it means they don’t go to another store to find their cards.

If you are an eBay or TCGplayer seller, or if you just speculate on the side, the sky is the limit. You may be buying a very narrow range of cards and flipping them very quickly and that will send your turnover through the roof.

Low single digits (zero to two) turns per year is pretty bad regardless. A little higher, three to four turns, is fine for a lot of businesses. I’d be very happy with five or more, and if you can get higher than that, you are killing it. Some companies can do eight or even double-digit turns, but at that point you are the one writing this article, not me.

Low Turnover – What Does It Tell You?

You need more protein in your diet. Just kidding. If your inventory turnover is very low, it means one of the following things:

  1. You have more inventory than you need to support your sales.

  2. You have the wrong mix of inventory and your non-movers are dragging you down.

To illustrate…

Example One: You specialize in buying and selling Standard cards and you are the go-to person in your area. Business is good, sales are as strong as ever and your local knowledge allows you to keep the right mix of cards in your binder. Despite this, inventory turns are still very low and you aren’t sure why.

Solution: This is scenario one above, you are just carrying too much stock. If your FNM usually draws 20 people, you don’t need ten pages of [card]Hero’s Downfall[/card] in your binder. The low inventory turnover is telling you that you can cut inventory without sacrificing sales. Don’t get caught building a huge inventory for bragging rights. Take that money and do something productive with it instead.

Next one…

Example Two: You, like many of us, have been making a killing on Modern. Your Modern staples are flying out of your binder and you can’t seem to get new stock in fast enough. Much to your surprise, your recent success is not reflected in your inventory turnover, which still stinks. What’s the deal?

Solution: Clearly your Modern stock is turning like crazy, so this is almost certainly scenario two. I would bet your Standard / Casual / EDH binder is not getting nearly as much action and you are effectively averaging a bunch of zeros into your calculation. Keep doing what you are doing with Modern, but either figure out how to start moving cards from your other binders or get rid of them and plow that money back into Modern cards.

In both cases, fixing the slow-turning inventory will save you money. It will either allow you to deploy money elsewhere while keeping your sales intact (example one) or help you meet demand and avoid stockouts by tilting your product mix toward things that sell better (example two). Both will pop your return on assets.

Get Granular – As the second example illustrates, sometimes you have to take a granular look instead of using total inventory turns. Try calculating inventory turnover for different segments of your inventory – Modern, EDH, Standard, etc.

In fact, if you are running a store and always have certain cards in stock, you’ll want to look at the turnover of those individual cards. Set your stock to a level that keeps your turnover healthy but not crazy high.

Turn, Baby, Turn

First and foremost, turnover should be used to guide your inventory decisions: how much and what to hold. But having a fast moving inventory carries with it some other benefits that may be less apparent.

  1. It reduces risk. Click back to my intro and read about the hidden costs of inventory, specifically #3: risk. A fast moving inventory really helps mitigate the risk of banning, reprint, obsolescence, etc. A big, stagnant inventory of Magic cards is a sitting duck for these things. If you decide to, say, move away from Legacy cards because you are afraid SCG is switching its open series to Modern, you don’t want to have to wait nine months to sell through your enormous stock.

  2. It helps with liquidity, which gives you flexibility. If your inventory is turning quickly, more of your assets are going to be passing through your hands as cash. Every time this happens, you get to make decisions on what to do with it. Most often you will just buy more inventory to sell, but you get to be more reactive on product mix. You might also decide you need cash for something else, like a booth at a local tournament. A pile of long-term specs (the slowest turning inventory possible) won’t help you there.

Balancing Act

There are two things I want to address here that I feel are important to Magic. They are both going to require judgement.

The first are rare, high-priced, or specialty items. These types of things are naturally slow turning and they aren’t going to fly out of your binder like Standard cards. This doesn’t mean that the principles of inventory turnover don’t apply, you just have to be more flexible. If you have some Beta duals or something equally spicy, taking the time to find the right buyer is a no-brainer. You can really lose a lot of money by rushing a sale like that.

That leads me to the second point, which is holding cards you think are going to go up in value. I could write a whole article on this (and I might), but my advice is this: sell your cards. If you can make a reasonable profit, just move the inventory and find something else to buy. When you find yourself justifying a very slow-turning inventory because the specs “haven’t matured yet,” I think you are probably taking the wrong approach.

People tend to underrate how well velocity translates to money. This is ultimately what made the  binder-grinding thing so successful. Take this example:

  • Trader A buys $100 worth of Snapcaster Mages at $15 each. He knows they are a stone-cold mortal lock to sell for $30 in one year and he will double up. He does. He now has $200. His inventory turnover is one.
  • Trader B decides to spend his $100 on a bunch of different stuff that will move well at tournaments. He knows that on the floor, he can get a little more than retail and probably make 10% profit at any given tournament. He goes to a different tournament each month of the year (12), sells his whole inventory each time, and then reinvests all profits into more inventory for the next tournament. At the end of the year he has $314 (!). His inventory turnover is 12.

This is the same epiphany you have the first time you learn about compounding interest in personal finance. The point is that you can make a ton of money selling at low margins if you are turning your stock quickly enough.

As I said, some judgement is required here – you might want to wait until the right PTQ season to sell, and that is totally reasonable. Otherwise, sell your cards. I cringe when people turn down a 50% profit on a spec because they are waiting for 100%. If you are heavy into “long term” stuff (more than a year until sale), I can almost guarantee you would be making more money with a different approach.

Wrapping Up

That’s a ton of info. I think I have one more article before this series is over, as I have to cover sunk costs and a few other miscellaneous things. Please feel free to ask questions – you can find me on Twitter, @acmtg, you can leave a comment here, or you can ask a question on the /mtgfinance Reddit, because I post there as well.

Thanks for reading.

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4 comments on Inventory Management Part III: Turnover

  1. Peter says:

    Great article, even better than the first two. I’d nominate these to be must read for starting financiers.
    I hope you’ll end up prolonging the series.

  2. QED2 says:

    What do you think a good mix of long-term investments vs short-term is? (I’m awar ethis will tend to be very personalized but maybe you can come up with several ‘archetypes’ of speculators and make a fantasy portfolio for each.)

  3. PegasusKnt says:

    Great read! I’m an amateur speculator, and this nuts-and-bolts type information is exactly the kind of advice I’m looking for. I look forward to reading more of your articles.

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