Effectively manage your stock turnover to increase productivity, reduce cost and improve customer confidence. Efficient inventory turnover underpins business success.
Inventory Turnover Results
|Days in Inventory|
Inventory Turnover: An effective way to measure and improve the velocity of your business
Are you running a retail business, or planning to buy one but want to make sure it is profitable? Inventory turnover is one of the basic methods to assess profitability of a businesses. Inventory turnover, also known as merchandise turnover, is a ratio that shows you how many times your business has sold and replaced its inventory in a given period of time. At the same time, it assesses if a company has excessive inventory in comparison to its sales levels.
What is inventory?
Inventory is the account or a list of all the goods a company has in its stock. It includes all the goods and materials that are used for production, and finished products, depending on the type of business. Generally, for retail businesses, inventory carries lists of finished products including clothing, grocery items, etc. Inventories in manufacturing companies hold a list of all the materials including component parts, lubricants, greases etc.
Use the Inventory Turnover Calculator to Support Informed Decision Making
The Inventory turnover calculator enables you to make more informed decisions about multiple effective factors that support a more profitable business: Let's see how the calculator, designed by iCalculator, makes the process easier for you.
- The calculator is simple, self-explanatory and online, which saves your time and effort.
- It helps you make decisions about marketing your products for efficient flows.
- The calculator helps you decide on when and how altering the manufacturing output of new products or increasing/decreasing stock could influence profitable for your company (control of supply to effect demand based on stock availability).
- The calculator also shows you if the inventory you currently have can end up losing its value over time, which further supports the decision on when to purchase new inventory.
- The results from the calculator also help you see if you have correct pricing or whether it needs to be changed in order to improve the inventory turnover (supporting insight into the effect of supply and demand on product/inventory pricing).
How the Inventory Turnover Calculator Works
The Calculator uses below given formula for calculating the inventory turnover:
IT = COGS / [ (BI+EI)/2]
IT=COGS / Average Inventory
- IT = Inventory Turnover - the ratio that shows you how many times your business has sold and replaced its inventory in a given period of time. Or, in simple terms, How many times you have sold your inventory in the time period in question.
- BI = Beginning Inventory - is the inventory cost in a company at the beginning of a period. You can also define it as the recorded cost of inventory at the end of the immediately preceding accounting period, which is carried forward into the start of the next accounting period.
- EI = Ending Inventory - is the amount of inventory that a company has in stock at the end of the accounting period that is available for sales.
- COGS = Cost of Goods Sold - is the amount that costs to a company for the production of all the goods sold in a particular period of time. In case of retail business this can be a purchase cost of the products sold.
- Number of Days in a year - the days you wish to include within the calculation, for example, you want to calculate the inventory turnover for a year, you will enter the number of days as 365. This is required for calculating days in inventory.
- Average Inventory - The calculator calculates average inventory by adding beginning inventory to ending inventory and dividing the sum by 2. Average inventory is more effective factor for this calculation as it helps in removing seasonality effects.
The calculator then divides this ratio by the number of days selected by you, to provide you with:
- DII = Days in Inventory - This will show you the average number of days a company holds its inventory before selling it.
Limitations of using the Inventory Turnover formula
Projection of inventory turnover for comparisons could present some limitations in regard to different industries. A home appliances manufacturing company would have inventory turnover far slower than a supermarket. Also, this method is open to manipulations through closeouts or discounts offered in order to get rid of old stock. This inflates the inventory turnover and can lead result in reductions to overall profitability.
Leverage Inventory Turnover for Business Success
Application of Inventory turnover can be used in various ways to benefit your business:
- You can review and reduce/eliminate slow moving or inactive products.
- The cost of goods can be compared on a regular basis with suppliers which in turn can support cost base negotiation based on volume to support discount(s) while placing orders, further supporting increased profit margins or more cost effective final pricing to the end customer so uplift sales.
- You will have an understanding of 'better selling' and fast moving/slow moving products that will help you in stocking inventory that sells and targeting slow movers for sales to support reduced dwell time.
- The accuracy in forecasting will be improved by checking trends, support internal KPIs and balance stock to meet strategic business objectives.
The Bottom Line
Inventory turnover shows how well a company is turning its inventory into sales; however, you should always consider the industry before making comparison with any other company. The higher the inventory turnover the better, on the other hand, appropriate measures should be taken for lower inventory turnover period on period (year on year, month on month, week on week comparison) as it indicates decline in sales and demands.
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