Updated: Feb 13, 2020
Do you know of GMROI?
Sounds like something that would be a fitting name for a superhero doesn’t it?
GMROI isn’t a person but a formula that packs a powerful punch. Used effectively, it can help your business do battle against the forces of evil.
…OK enough of the comic book references.
GMROI (Gross Margin Return On Investment) as defined by Investopedia is an inventory profitability evaluation ratio that analyzes a firm’s ability to turn inventory into cash above the cost of the inventory. It is calculated by dividing the gross margin by the average inventory cost.
Few businesses understand this better than retailers.
Consider this: When a business sells their widgets through a retailer they typically do so with 90-120 day terms. That retailer typically turns those widgets around quite quickly and reorders.
Say 30 days have past and the retailer puts in another order. The business selling to the retailer has yet to be paid on the initial order and is now expected to provide another batch of widgets.
If this trend continues the retailer could reorder 3 or 4 times, collect payment from its end customers and have access to all that capital before paying for the first set of widgets.
This type of arrangement is great for the retailer as it allows them to leverage their suppliers resources (cash generated on sales before payment is due) to grow their business.
Businesses selling through retailers agree to such arrangements because it helps them ramp up sales quickly through established distribution channels.
Think about your business in this context.
Do you have suppliers’ that depend on you to do well?
Can they be more patient in exchange for securing more of your business?
Imagine if you were able to consistently negotiate an additional 30 days to 60 days on invoices?
How much more capital would you be able to redeploy into your business?
For many small businesses it would make a world of a difference.
KEY POINT: SOMEONES USING YOUR CASH; IT'S EITHER YOU OR YOUR CUSTOMER.
Marcin has been instrumental in building several businesses including commercial & multi family real estate investment partnerships, a consulting practice and a smart home security business serving customers nationwide. Marcin has secured over $100MM in growth capital for various businesses and has collectively spoken in front of thousands of entrepreneurs, business owners, investors and those just starting to explore living life on their own terms. Outside the office Marcin can be found at the gym lifting heavy things or on the road zipping along on an extended bicycle ride.
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