To understand the GMROI Reports, you must understand the components of the GMROI calculation. The calculation is comprised of the following:
The system determines the average on-hand quantity of the product for the defined 365-day period. The calculation takes each product and determines how many were on hand at the Start Date. Every time a product's on-hand amount changes from the Start Date, the pre-change on-hand quantity is multiplied by the number of days it was at that quantity. At the report end date, it totals these sums and divides by 365. This process results in the most accurate average quantity on hand for that product for that period.
Each report setup window contains a Cost Basis field. This value is the actual price of the item you are keeping on-hand. The reports multiply this value by the average on-hand quantity in a 365-day period to determine the average dollar on-hand cost for your inventory investment.
Avg $ On-Hand Cost = (Cost * Avg On-Hand Quantity)
You can change the Cost Basis field, if needed. By default the value displaying in the Cost Basis field is the COGS-COST global basis. This basis is the average cost of goods throughout the branches you have in your company. To change this field, select from the list provided. The system defaults to Avg Actual Cost. This cost is calculated by dividing the amount in the Actual COGS$ column of the report by the number of orders. The value in the Actual COGS$ column is calculated using the actual cost of goods on the order, rather than the Global Basis COGS.
The total cost of goods sold (as defined in the sales order) in a 365-day period is divided by the average on-hand cost for a 365-day period to determine the turnover. This calculation is also true for the total generic cost.
Cost of Goods Sold or Generic Cost for Theoretical Turnover = (Annual COGS for Product / Average On-Hand Cost)
Note: The basis used as the cost of goods sold is set in the Cost Of Goods Sold Basis Name control maintenance record. For example, REP-COST (replacement cost), STD-COST (standard cost), or AVG-COST (average cost).
Turnover is calculated every time you run the report, enabling you to produce a GMROI for a one-year period.
If you added a product included in the report to your inventory less than a year ago, the system extrapolates the existing data to create a one-year value.
If you run the report for a period of less than one year, the system extrapolates all the data to create one-year values for the report.
To find the gross margin return on investment (GMROI) for a product, the turnover is multiplied by the actual markup percentage of the product sales over the last 365 days.
GMROI = (Theoretical Turnover * Markup percentage for 365-Day Period)
A GMROI ratio of 120% is considered standard. A GMROI of 120% at 40% markup for each of 3 turns is more profitable than a GMROI of 120% at 20% markup for each of 6 turns. This difference is due to the expenses inherent in turnover.
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