![]() ![]() ![]() In many ways, your turnover rate is an indicator of efficiency-warehouse efficiency, purchase efficiency, and proper pricing. More importantly, then the fact that you measure inventory turnover is how. Low or high inventory can mean something different depending on the industry, organizational maturity, and other factors. Our recommendation is to always compare your own turnover rate against other retailers in your vertical, or at least against industry averages. ![]() Retailers can read a lot into their inventory rate, but the number says very little in and of itself. Make the most of it by considering industry and limiting inefficiency In addition, too high of an inventory rate could lead to stock shortages that translate to lost business or dissatisfied customers. It can also, however, point to inefficient purchasing practices or pricing. High inventory rate might indicate that demand for your stock consistently high. If sales will be lagging behind what a retailer has purchased, for example, warehouse inefficiencies may result (you don’t want inventory items taking up valuable space for too long, for example. This is cash that cannot immediately be put toward paying salaries or evening up with lenders and suppliers.Ī low turnover rate can also impact a company’s ability to accurately forecast for budgeting, inventory purchase decisions, and sales. Generally speaking, the fewer items sold in a given inventory period, the longer a company’s cash is tied up in that inventory. Low inventory turnover rate might indicate that demand is lagging over a given year or period of years historically. Indeed, inventory turnover rate can tell you a couple of things. Many retailers use inventory turnover rate to estimate how quickly they might expect to generate profit, or what their cash flow might look like during the next fiscal period. This, in turn, will affect things like revenue and profit margin. We mentioned that the longer you hold inventory, the more your holding costs will grow. Still, a retailer’s ability to consistently turn stock on hand into cash will impact other areas of business. This is especially true of smaller businesses without formal or automated inventory management processes. It conjures flashbacks to the days of analog when retailers and accountants would calculate everything by hand, using paper, pen, and massive ledgers. Why is inventory turnover important?įor whatever reason, inventory turnover is one of those calculations that gives retailers the heebie-jeebies. NOTE: Usually, COGS and average inventory are taken over the same twelve-month period, though some retailers will calculate inventory turnover more frequently. ![]() For example, a turnover ratio of 4 means your inventory turnover period lapses every 91 or so days (365/4). The resulting rate will give you the number of times that you turn over inventory in a given time period, which can be converted to days. To calculate your inventory turnover rate, divide your cost of goods sold (sometimes called Cost of Sales or Cost of Revenue) by your average inventory. *You have some left over shirts from the year prior still so we need to account for that cost (5 remain at $5 per item). Let’s see how much you sold this year and how much is remaining … Ending Inventory So you now have $1,000 in total cost of inventory. We buy more when it’s cheaper and buy less when it’s more expensive. *Your cost per item will never be static (wouldn’t that be nice!), so let’s have some fun with that too and take that into consideration. Throughout the year you bought a couple more items … Bought Inventory You started 2019 with 50 pieces of inventory (to keep things simple): 20 shirts, 10 pairs of jeans, 10 pairs of shoes, 5 sweaters, and 5 really- bitchin-sunglasses. Related: Shopify inventory best practices ![]()
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