How to calculate inventory ROI (and why it should drive every reorder)

Most inventory tools answer one question: when will I run out? That is necessary, but it is not the question that grows a business. The real question is: with the cash I have this week, which SKU should I buy first? That is an ROI question, and it should drive every reorder.

Start with GMROI

Gross Margin Return on Inventory Investment (GMROI) tells you how many gross-margin dollars you earn for every dollar tied up in inventory:

GMROI = annual gross margin ÷ average inventory cost

A GMROI of 3.0 means every $1 of inventory throws off $3 of gross margin a year. Below ~1.0 you are losing money on that SKU once you count carrying costs. GMROI is the single best number for comparing two products that look equally "good" on revenue.

Pair it with inventory turnover

Inventory turnover = cost of goods sold ÷ average inventory cost

Turnover tells you how many times a year you sell through your average stock. High margin with low turnover can lose to lower margin with fast turnover, because the fast turner recycles your cash more often. GMROI quietly captures both, which is why we lean on it.

The "next dollar" framing

Think of your reorder budget like an investor thinks about a portfolio. You do not ask "is this SKU profitable?" in isolation. You ask "of everything I could buy right now, where does the next dollar earn the most before I run out of cash?"

That reframing changes the order of your purchase orders. The SKU about to stock out is not automatically first, if its GMROI is mediocre, a higher-return product that is three weeks from stockout may deserve the cash instead.

A worked comparison

Two products, same $5,000 you could spend this week:

• SKU A: 45% margin, turns 8× a year, never on promotion. GMROI ≈ 3.6.
• SKU B: 60% margin, turns 2× a year, frequently discounted to move. GMROI ≈ 1.5.

SKU B looks more attractive on margin alone. But SKU A returns more than twice the margin per dollar of inventory because it recycles your cash four times as fast. Funding A first, then B, is the higher-compounding choice, even though B "feels" like the premium product.

Why this is hard to do by hand

Calculating GMROI for one SKU is easy. Doing it across a few hundred, re-ranking as costs and demand shift, and then constraining the result to the cash you actually have this week, is not. That is exactly the arithmetic that gets skipped under time pressure, which is how cash ends up in the wrong SKUs.

Make ROI the default

InventoryIQ scores every reorder by ROI under your real cash runway, so your purchase orders come out ranked by return, not just by stockout date. Start a free trial and let it rank your catalog for you.