The number of customers you have doesn't gauge the health of your retail business. No matter how much revenue your business is creating, if you're spending even more on inventory that's not selling, your enterprise will eventually fail if nothing else changes. The amount of inventory sold compared to how much inventory you've bought is the important factor to consider. It's crucial that retailers keep track of this rate of sale, otherwise known as the sell-through rate, to allow them to make changes as needed.

Tip

Add the number of items you've sold to the number of items you still have on hand. Divide the number of units sold by the number you've just calculated to find the rate of sale for a given period.

Why is Rate of Sale Important?

The rate of sale, or sell-through, is one of the core ways to measure the health of a retail business. It's a metric that can be used to identify a number of financial problems, even uncovering some that aren't easily seen. Both ends of the sell-through equation can be equally bad for business. If your rate of sale is very low it means that you're not selling products as quickly as you could or should. An overly high rate, on the other hand, means you're cutting it too close with the inventory and may be losing sales due to lack of products. The ideal place is somewhere in the middle, and that's best determined by watching your financial trends over a certain period.

Figuring Your Rate of Sale

The rate of sale in your store is a comparison between what you had on hand and how much of it you've sold in a given period of time. Begin with the number of items you've sold and add it to the number of items you still have on hand. Take the number of units sold again and divide it by this aggregate number, then move the decimal point over two places to get the rate of sale percentage.

For instance, if you're selling coffee mugs you may have sold 200 of them in a month. After doing inventory, you may have found 50 left on the shelves. This is a total of 250 coffee mugs, which was the beginning inventory. Take the 200 mugs you sold and divide them by the 250 beginning inventory. Move the decimal over two spaces, and you'll come up with a rate of sale of 80 percent on your coffee mugs that month.

Not the Most Important Metric at All Times

Researching the rate of sale can be time-and-resource-intensive. You need to set up an entire system of inventory numbers before you can begin to compare them over time. Once the system is in place, the tasks take less time. But the original set-up can be daunting. Also, while the rate of sale is an important metric that all retail business owners should be aware of, it isn't the only factor you need to consider. There are shortcomings with using it for your business model. One major problem with sell-through figures is that they can tell you that a problem exists, but they often give you no clue why these particular products or services aren't selling. Is it pricing? Have trends shifted away from this style? Is your competition beating you with a different product? Sell-through is a good indicator that you need to investigate further, but often is nothing more.