GMROI, gross margin return on inventory, says how many dollars of gross margin each dollar of stock earned in a year: GMROI = gross margin ÷ average inventory at cost. A shelf of jams that made $26,600 of gross margin on $2,400 of stock has a GMROI of 11.1; a gift shelf that made $12,000 on $9,600 has 1.25. Both make money, but the jam does it with a quarter of the cash. That's what GMROI is for: deciding where the money tied up in stock earns the most. Below is the formula, a farm store's year by category, what a good GMROI is, and a free calculator.
The short version
- GMROI = gross margin ÷ average inventory at cost, over the same year.
- Gross margin = sales − cost of goods sold.
- Average inventory = (opening + closing) ÷ 2, or the average of monthly counts if stock swings.
- The same thing two ways: gross margin % × sales ÷ average inventory at cost.
- Work it out by category or product; the whole-business number hides the slow shelf.
- Above 1, each dollar of stock earns more than a dollar a year; compare your own categories first.
- TaroStack reports margins by product and stock value at cost; GMROI is one division away. More below.
The formula
GMROI = gross margin ÷ average inventory at cost
Gross margin = sales − cost of goods sold
Average inventory at cost = (opening inventory + closing inventory) ÷ 2
Everything is at cost except the sales: inventory valued at what you paid or what it cost to make, not at the shelf price. The same number can be written as gross margin % × (sales ÷ average inventory at cost), which shows the two ways to raise it: a better margin, or the same margin on less stock. How margin differs from markup is in markup vs margin.
An example: a farm store's year
Clear Fork Farm Store, a made-up farm store in Loudonville, Ohio, I use in these examples, makes its own jams and baked goods and sells local honey, cheese, gifts and candles alongside them. Its year by category:
| Category | Sales | Cost of goods sold | Gross margin | Margin % | Average inventory | GMROI |
|---|---|---|---|---|---|---|
| Our jams | $38,000 | $11,400 | $26,600 | 70% | $2,400 | 11.08 |
| Our baked goods | $52,000 | $18,200 | $33,800 | 65% | $1,200 | 28.17 |
| Local honey | $18,000 | $10,800 | $7,200 | 40% | $2,700 | 2.67 |
| Cheese | $30,000 | $19,500 | $10,500 | 35% | $1,500 | 7.00 |
| Gifts and candles | $24,000 | $12,000 | $12,000 | 50% | $9,600 | 1.25 |
| Whole store | $162,000 | $71,900 | $90,100 | 56% | $17,400 | 5.18 |
The baked goods score highest because what's made each morning sells that day, so there's little stock to hold; the number is high, but what it mostly measures is how perishable they are. The useful comparison is at the bottom: cheese has the lowest margin in the store, 35%, and still earns more than five times what the gifts do on each dollar of stock, because it sells and is reordered every week. The gifts carry more than half the store's inventory, $9,600 of $17,400, for 13% of its margin. Holding fewer gifts, or ones that sell faster, frees cash without losing much. How fast each category turns over is in inventory turnover example.
What a good GMROI is
Above 1, a dollar of stock earns more than a dollar of gross margin in a year. Past that, the useful benchmark is your own store: the categories well below the average are tying up cash that the others would use better. Two cautions. GMROI measures gross margin, before rent, wages and the time a category takes, so a high number on something fiddly can flatter it. And a perishable category always looks good, because there's little of it on hand; that doesn't mean more of it would sell. What a sound margin looks like for food is in good profit margin for a food product.
Average inventory, done right
Opening plus closing, halved, is fine when stock is steady. When it isn't, like gifts that build up for December and empty in January, a year-end count catches the low and misses the peak. Then use the average of twelve monthly counts. The money version of how long stock sits is in days inventory outstanding example.
Get the calculator
Download the GMROI calculator. One line for each category or product: type the year's sales, the cost of goods sold, and the inventory at cost at the start and end of the year; gross margin, margin %, average inventory and GMROI fill in, with the whole store at the side. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
The calculator is only as good as the two numbers it's fed. Cost of goods sold by category means knowing what each jam cost to make and what each gift cost to buy; inventory at cost means a count with a cost on every line. Done once a year from the accountant's figures, it tells you which shelf was slow last year.
How TaroStack does it
TaroStack reports margins by product and stock value at cost; GMROI is one division away.
Margins by product. Every sale is recorded against its product and customer, and margins are reported by product and by customer, from what each one cost to make or buy.
Stock value at cost. Stock is valued at cost, first in first out, freight included, by site and month, so the average inventory for each category comes from twelve months of value, not one year-end count.
What things cost to make. The jams and baked goods are recipes with sub-recipes, and each batch's actual cost is recorded next to the standard one, so cost of goods sold for what you make is a real number.
| The job | Spreadsheet | In TaroStack |
|---|---|---|
| Gross margin by category | From the accountant's figures | Margins by product |
| Average inventory | Opening and closing counts | Stock value at cost, by month |
| Cost of what you make | An estimate | Each batch's actual cost |
| GMROI | This calculator | Margin ÷ stock value, from two reports |
Costing, margins and stock value are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.