Business Plan - Purchasing Objectives
Establishing the purchasing requirements is an operational function in any business with physical stock supplies. Purchasing activities involve sourcing and obtaining supplies as well as paying for them. Many forms of business activity require some kind of stock supplies. Stock supplies required could include raw materials, component parts, trading stock or job materials.
The purchasing objectives and the management aim for the purchasing function should be to obtain the best possible supply terms. Because the major concern in negotiating supply terms is the cost of supplies, your main purchasing objective should be measured in the average gross profit margin. The gross profit margin is calculated as the percentage of gross profit made on the sale of the stock item. It measures how cheaply you purchase stock supplies.
Inventory (Stock) Turnover Considerations
When considering stock as part of your purchasing objectives, a low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or shortages. A high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business. Assume cost of sales is $70,000, beginning inventory is $10,000, and ending inventory is $9,000. The inventory turnover equals 7.37 times ($70,000/$9500).