Inventory Turnover Ratio (ITR) or just “Inventory Turnover” is a number that shows how long it takes a business to sell all of its inventory. Inventory turnover (IT) can also be used to show how well a business is doing in terms of sales. Businesses with a high IT are doing better in terms of sales than those with a low IT score.
What is meant by inventory turnover?
Inventory turnover is a financial ratio that shows how many times a company sold its stock and bought more in a given amount of time. The inventory turnover formula helps break this time period down into days and shows how long it takes for a company to sell all of its stock.
How to figure out how many times items are sold?
By figuring out the inventory turnover and keeping a close eye on it, businesses can better manage their stock and make better decisions about pricing, marketing, and buying new stock. The formula for figuring out the number of times an item is sold is as follows, Inventory Turnover rate = Average Inventory / Cost of Goods Sold. To better understand the calculation, we need to define the variables:
- Time frame: usually a year, but it can be any length of time;
- The average inventory is the sum of the value of the items you had at the beginning of the period and the value of the items you had at the end of the period.
- Cost of Goods Sold (COGS): Your annual income statement also shows the cost of the goods you sold.
So, the Inventory Turnover rate can also be found by using the formula IT = Cost of Goods Sold / [(beginning inventory + ending inventory)/2].
What the number of times an item is sold can tell you
The Inventory Turnover tells you how quickly a business is selling the products it has on hand, which can mean more than one thing. When a business has a low Inventory Turnover Rate, it can mean:
- There is too much or too much extra inventory; the goods for sale don’t meet the needs of the targeted niche; the goods are priced higher than what consumers are willing to pay for them; or there aren’t enough or successful marketing efforts to get people interested in the products and make sales.
But sometimes it can be good to have a slow turnover of stock. If you have a high inventory turnover rate, you might lose business if your customers can’t get the product or product variant they want when they need it. Also, if you think the price of a certain product will go up in the near future, it’s a good idea to buy more of it before the price goes up. That way, you can keep your profit margin high without raising the prices you charge your customers.
In general, though, you should keep your inventory turnover high for the following reasons:
- stores that get rid of their stock more quickly tend to do better;
- The longer you keep a product, the more it will cost you to handle and store it, which will hurt your profits. Or, if the goods are perishable, you may have to throw them away.
- If a business keeps trying to sell things that customers don’t want and doesn’t give them anything new, customers will have less reason to come back.
- Low inventory turnover also has an opportunity cost, because a product that doesn’t sell well can hurt the business’s cash flow and stop it from buying other products that might sell faster.
Fast fashion stores like Zara and H&M are great examples of businesses that keep their inventory turnover rate high. They only buy a small amount of each product they order, so they can quickly sell it all and order more. They do this on a regular basis. This keeps their customers interested in what’s new and gives them a reason to come back to the stores more often. It also keeps their storage costs low.
What is deadstock, and what should I do with it?
Deadstock is also called “obsolete inventory,” and it is used to describe items that haven’t been sold and are getting close to the end of their useful life. It is also inventory that hasn’t been sold or used in a long time and isn’t likely to be sold in the near future. This kind of inventory can cost a company a lot of money, so it needs to be written off or written down. In today’s highly competitive world, where consumers are better informed and have higher expectations of the products they buy, product life cycles tend to be shorter and inventory goes out of date much faster than it used to.
How to better keep track of stock?
Inventory management is important for any business that wants to make sure the stock they have on hand will bring in money and make them money. An open-to-buy system can help businesses keep track of how their stock is restocked better. The open-to-buy system is a way to budget for and keep track of the purchase of new goods. This can be used to track and improve the way inventory is managed. It can also be added to the business’s protocol for financing and investing. But remember that this open-to-buy system doesn’t work for any kind of product. It can work well for trendy clothes and accessories, but it won’t work for fast-selling consumer goods or other everyday items.
For the best inventory management, you should buy software that syncs in real time and makes sure that your stock levels are always up to date. Different businesses have different ways of managing their inventory, so it’s important to choose the software that works best for your store. Make sure you compare several programs before you decide on one and pay for it.
Days of Sales of Stock
Stepping it up a notch, you would also want to pay attention to the Days Sales of Inventory (DSI), which is also an important measure for managing your inventory. Days Sales of Inventory is the opposite of Inventory Turnover. It tells you how long it takes your business to sell inventory, while Inventory Turnover tells you how many times you’ll need to restock in a year. (Inventory / Cost of Goods Sold)*365 gives you the number of days that your inventory has been sold. This number will tell you how many days it will take to sell everything you have in stock.
What is a good turnover rate for stock?
It’s hard to say what a good inventory turnover rate is for a business because it depends so much on the market it works in and the products it sells. For instance, a company that makes cars will have a lower inventory turnover rate than a company that sells goods that sell quickly. This is because people tend to buy cheap things much more quickly than expensive things, for which they need more time to decide.
Because of this, Inventory Turnover rates can only be judged when the average for the industry and the competition are also taken into account. Companies want their inventory turnover rate to be as high as possible because it keeps their assets from being tied down in goods and gives them more cash and financial stability. Also, if you keep the inventory turnover high, you won’t end up with things that can’t be sold. This can happen for many different reasons, such as spoilage, damage while being stored, technological obsolescence, theft, and so on. But at the same time, it’s important to make sure you have enough products on hand so that you don’t lose business because you don’t have what your potential customers want.
To sum up, it’s important for every business to keep a close eye on their Inventory Turnover rate and evaluate it regularly. They should also compare it to the best-in-class companies in their industry. There are a number of ways to change the Inventory Turnover, such as through discounts and sales. But it’s also important to remember that these things will hurt the profit margin on the goods, which will affect the Return On Investment (ROI). Because of this, it is best to plan carefully and only buy as much inventory as you are sure you can sell.