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What Is Inventory Turnover?

All types of business entities require the aesthetic help of inventory turnovers because they act as track inventory in terms of finding out how many times the items of a specific business is sold and replaced in a certain span of time. The span of time would either be in 6 months to a year.

Inventory turnover requires an equation on how to calculate inventory turnover, and the formula of inventory turnover = cost of goods sold divided by average inventory. Other terms for inventory turnover are inventory turns, stock turns, stock turnover turns, and merchandise turnover.

 

Key Elements to Consider in Inventory Turnover

In some companies, inventories are often expressed “in days or weeks in supply,” therefore producing good and intelligible values providing immediate comparisons, which are considered to be very vital in the business inventory. So if you are planning to analyze inventory turnovers, free inventory templates can help you or try and consider the following elements:

Performance Metric

  • Low Inventory Turnover – this is mostly associated with inventories that exceed its limits, therefore overstocking, dead inventory arise. If the business has low return, then there is a probability of getting liquidation problems, plus a pressure on capital will rapidly increase.
  • High Inventory Turnover – this type of inventory is indicating a positive result, meaning goods are sold immediately and would therefore result in good inventory management; however, insufficient safety stock may be the possible risk.

 

Limits

There have been limits set on inventory turnovers, fluctuations do not necessarily and immediately reflect within the year.

Improvement of Inventory Turnover

In improving inventory turnovers, specific levelers are involved in the process of its improvement and they are the following:

  • Sourcing – the choosing of suppliers that will provide a shorter lead time compared to your existing supplier
  • Forecasting – the process of refining the demand forecasts for the purpose of accuracy.
  • Service Level – this is the process of tuning the frequency of stock-outs that are still considered acceptable.

 

 

Increase and Decrease of Inventory Returns

It is normal for a business to have high and sometimes low returns, but even when it is considered to be mundane, there has to be actions and solutions needed to alleviate and prevent from getting low returns in the future.

Inventory Increase

  • Carrying Costs – there is inventory increase if the carrying costs increase because it includes all the expenses involved with storing.
  • Bulk Discounts – there is an increase in earnings if bulk discounts are executed; however, in the event that a bulk discount decreases the product’s cost per unit, the sale margin will be higher.
  • Ordering Costs – ordering costs increases the inventory depending on the tasks involved such as filling out forms, making phone calls, buying new inventory.
  • Sales – increase in sales contribute much in a business inventory (business inventory templates).

 

Inventory Decrease

When there is a decrease in inventory, it means that the cash is not converted as quickly as possible. Furthermore, the products are held by the company for so long, which determines that the product is not demanded by consumers as what’s expected by producers. It comes with utter necessity for a company to highlight this matter for the future prosperity of it.

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