![]() ![]() Not having the resources to place more orders.Track your inventory turnover ratio closely so as to see how well you’re doing this.Ĭalculating inventory turnover helps to measure your efficiency at this.ĪLSO READ: What Is Gross Margin Return on Investment (GMROI)?Ī low turnover ratio could have several causes: Minimize the possibility of excess and obsolete stock, and selling at a loss.Enables businesses to respond quickly to the marketplace and react to demand changes.Your cash keeps getting freed, enabling you to replenish stock or invest them elsewhere.When inventory sells quickly your carrying costs are low.The benefits of improving your inventory turnover are many: ![]() Now that you know what is inventory turnover and how to calculate it, you should also know how you can bring more efficiency in managing your inventory, reduce warehousing expenses, and increase sales. The inventory turnover ratio is typically calculated at the end of the financial year however, it can differ depending on unique business requirements.ĪLSO READ: Inventory Management Trends to Know How to Improve Inventory Turnover? However, if you sold 800 products and still have 200 items in inventory, it means that your inventory turned four times, or your ITR is 4. Inventory turnover ratio = COGS / Average Inventory What is Considered a Favorable Inventory Turnover Rate?Īnything between 4 and 6 is considered a good inventor turnover ratio as it indicates that you have a good balance between restocking items and sales inventory.Īnything above it indicates strong sales performance and below it could be an indicator of poor sales.įor example, if you use the inventory turnover calculatorand get the answer 1 it means that you had say 200 items in stock and you sold 200 – all of them. The inventory turnover formula can be expressed as : We can calculate the inventory turnover ratio by dividing the total COGS for a specific time period by the average inventory for the same period. If a business has an average inventory of SAR 20,000, and SAR 100,00 in annual sales, it means that it turned its inventory 5 times in a year.ĪLSO READ: Inventory Cycle Counting and What are its Benefits? How Is Inventory Turnover Ratio Calculated? This effectively translates into the number of times a company could sell its average inventory in monetary terms in a year. It shows the number of times the average inventory of a company is turned or sold during a specific time period. The inventory turnover ratio is an indication of the efficiency of your inventory management, and is arrived at by comparing the average inventory held over a specific time period, with the cost of goods sold. ![]() On the other hand, a high inventory turnover indicates good cash flowbecause there is high demand for your products.ĪLSO READ: Common Inventory Management Mistakes to Avoid What is Inventory Turnover Ratio? ![]() So, what does this mean for your organization essentially?Ī low inventory turnover is not good news it means delayed replenishment of inventory or excess stock of inventory that doesn’t sell quickly. Knowing the figure offers several insights into which of your products are selling well, along with how the overall costs are managed by the company. Inventory turnover refers to how much inventory or stock of products your business has sold in a specific period. Managing inventory is a very complex function as there are multiple factors to be considered. Inventory is crucial for any business dealing in products – manufacture or sale. What is Inventory Turnover? Tips to Improve Inventory Turnover ![]()
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