Your company may have deliberately overstocked goods in advance of a product launch, or forecasted a supply shortage, supplier price increase or widespread inflationary pricing. You need to keep in mind other key performance indicators ( KPIs) and the business environment when making decisions.įor example, there may be a strategic business reason for your low turnover ratio.
What inventory turnover ratio indicatesĪ turnover ratio cannot be taken at face value. Learn more about finding industry benchmarks for your business in this article. Trends for turnover ratios in your own business history can also provide some guidance. Industry benchmarks can be found in an online search or in databases managed by industry associations or research firms. “If you're selling laptops, they’ll probably sell more quickly than if you’re selling high-end cars, which typically sit in inventory longer.” “It’s important to compare turnover ratios within the same industry,” says Barros. The answers to these questions will have a significant impact on the health of your business. Operations-Are manufacturing lead times or delays responsible for this ratio? Should we reduce production or purchasing? Supply chain-Have supply chain delays, shortages or lack of visibility partly led to this? Sales-Are our salespeople performing below par? Should we provide missing tools or training for our inventory turnover ratio? Pricing-Is our pricing too high? Should we discount some products or bundle them to clear out some stock? Marketing-Are customers buying less? Are we offering the right product mix? Should we change our offer for future sales? Should we invest more in promotions to support sales? If your turnover ratio is lower than the benchmark for your industry, you should be asking yourself some questions about your company: You could turn some of your obsolete inventory into cash by selling it off at a discount to specific clients. Monitoring the inventory turnover ratio helps businesses make better decisions.įor example, if you analyze your purchasing patterns as well as those of your clients, you could find ways to minimize the amount of inventory on hand. Why is the inventory turnover ratio important? The standard method for calculating inventory turnover ratio involves selecting from your balance sheet the cost of goods sold (COGS) and dividing it by your average inventory value.
How do you calculate the inventory turnover ratio?
“Your goal as a business owner is, generally speaking, to turn inventory into cash-the quicker the better,” says Alexandre Barros, a business advisor with expertise in financial management and controls at BDC Advisory Services. help you see if you're missing out on sales opportunities.enable you to see where you might improve your buying practices and inventory management.point to the health and competitiveness of your company.Measuring how efficiently you’re using your inventory can: Inventory turnover can also be called stock turnover, merchandise turnover, inventory turns and, simply, turns.Īssessing your inventory turnover is important because gross profit is earned each time such a turnover occurs. This ratio is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices and inventory management. The inventory turnover ratio measures the number of times inventory has been sold and replaced, that is, turned over in a given period of time. Growth & Transition Capital financing solutions Kauffman Fellows Program Partial Scholarship Venture Capital Catalyst Initiative (VCCI) Industrial, Clean and Energy Technology (ICE) Venture Fund
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