Guard against obsolescenceĪ low turnover ratio serves as a warning signal, allowing you to take preemptive action before inventory becomes dead stock. Keeping the ratio balanced means you will have enough inventory to satisfy your customers while not overstocking and risking obsolescence. Tracking the ITR ensures not just meeting but optimizing for customer demand. This promotes better liquidity and cash flow, allowing you to free up working capital for other critical business investments. Optimized cash flowĪ high inventory turnover ratio means you’re quickly converting your inventory into sales. Here is how keeping an eye on your stock turnover allows you to detect issues and improve your business. Therefore, the inventory turnover ratio is also a good indicator of the level of synchronization between the sales and procurement departments.Įasily track your inventory performance with MRPeasy Try for free Why is the inventory turnover ratio important?Īs mentioned, the inventory turnover rate is one of the best metrics to assess both your inventory and supply chain management effectiveness as well as your overall business performance. If the company’s inventory turnover is very high, then it might be an indication of inadequate inventory levels, which could cause missed business opportunities due to not being able to fill customer orders.Ĭonversely, a low ratio could signify either weak sales or overstocking, which will negatively affect your bottom line, the former by not bringing in revenue, and the latter by tying up cash that could be used elsewhere. There is a balance, however, to be found when managing inventory. Thus, it is a reflection of how effectively the company caters to the market, and how efficient it is in inventory management. Inventory turnover ratio measures the performance of the business – if the inventory turnover ratio is high, then usually goods are sold quickly and the company carries little to no excess inventory if inventory turnover is low, sales might be weak and there could be a large amount of excess stock. While in retail and distributing environments, only finished goods flow in and out of inventory, in manufacturing, the inventory accounted for when calculating the inventory turnover ratio includes finished goods, raw materials, and work-in-process goods. This ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory for the period. Specifically, it shows the number of times a company’s inventory is used and replaced over a given accounting period, often a year. The inventory turnover ratio (ITR) is a key performance indicator that measures how efficiently a company manages its inventory. How to improve your inventory turnover?.What is the ideal inventory turnover ratio?.Why is the inventory turnover ratio important?.In our example, an inventory turnover of 8 times per year translates to 45.6 days (365/8). Just take the number of days in a year and divide that by the inventory turnover. Basically, DSI is the number of days it takes to turn inventory into sales, while inventory turnover determines how many times in a year inventory is sold or used. DSI is essentially the inverse of inventory turnover for a given period-calculated as (Average Inventory / COGS) x 365. Meanwhile, days of inventory (DSI) looks at the average time a company can turn its inventory into sales. For instance, in a grocery store, milk will turn over relatively quickly (we hope) while Holiday cards may turn over much more slowly. Inventory turnover shows how quickly a company can sell its inventory, measuring that velocity by number of times per year the inventory theoretically rolls over completely. If the company’s line of business is to sell merchandise, the more often it does so, the more operationally successful it is. Inventory turnover is also a measure of a firm’s operational performance. The more often inventory is sold, the more cash generated by the firm to pay bills and debts. For the Years Ended Decemand 2018 Description
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