It’s important to understand the nature of budgeting inventory using a formula. I have attempted in this article to explain an approach for determining inventory levels that can be used by any business, regardless of its makeup. However, using a goal, such as GMROI to arrive at an inventory budget does not address the myriad strategic decisions that should be considered when working on your own company’s budgets.
An overarching merchandising strategy must be considered when deciding whether to over-inventory your watch or bridal departments, for example, not so much to generate a desired return on investment, but in order to own a specific position in the market or when you may be fighting to take market share. Deciding to invest more than a formula would dictate in order to take advantage of a significant purchase of loose diamonds, may take precedence over the adherence to a simple formulaic approach to the budgeting process.
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