Low Inventory Turnover RatioĪ low Inventory Turnover Ratio indicates that there are slow-moving sales. Once you have your ratio ready, how do you know if your business is on the more strong side of things or weak? Inventory Ratio between 4 to 6 is generally a good ratio! It indicates that both restock rate and sales are balanced. Here is how to calculate cost of goods sold (cogs). Inventory Turnover Ratio= Cost of Goods Sold / Average Inventory How to Calculate Inventory Turnover Ratio?įormula to calculate Inventory Turnover Ratio: Look at how to calculate it with a simple formula. Now that you know why Inventory Turnover Ratio is so crucial to your business. For example, If your organization has a high inventory turnover ratio, it means higher liquidity- because it indicates that you as a company has sold inventories in large amount and received money from customers more often. Inventory Turnover Ratio can also help you measure the liquidity of your organization. It helps you analyze how fast your organization is selling its stocks and comparing its efficiency in selling the goods against the industry standards. Inventory Turnover Ratio also illustrates poor inventory planning and the need for new techniques to improve stocks and your business in general. If you fail to monitor your inventory turnover, it risks losing customers due to a lack of goods available. Here is an example: in case of high inventory turnover, a company must constantly purchase goods. Since the Inventory Turnover Ratio indicates high or low demand of goods, it prepares you for restocking and prevents you from overstocking. Therefore, monitoring the inventory turnover ratio is a must as it helps you keep track of movement in the goods over time.Īnother reason why the Inventory Turnover Ratio is a go-to for a successful operation of any business is- When you have inventories in large quantities and less demand, it will take up a lot of valuable space in the warehouse. It will directly translate to a loss of a portion of the company's capital. Therefore, with the help of the Inventory Turnover Ratio, you can exactly estimate the amount of inventory to replace instead of blindly stocking up.Īdditionally, if your inventories turn out to be less in demand eventually, or even become outdated, maybe even disintegrate. On an off chance, if the items in stock do not get sold, the organization will barely have any cash available to pay its- employees, banks, bills, suppliers, lenders, and so on. Organizations often have a lot of cash tied up in their inventory. Inventory turnover is significant to a company in many ways: Mentioned below are a few benefits you might want to know before we learn how to calculate Inventory Turnover Ratio.ħ Reasons Why Inventory Turnover Ratio is Important This calculation of inventory turnover is a gateway to many possible company benefits. The Inventory Turnover Ratio is the number of times a company sells or replaces the inventory during a given period. What if you knew exactly when you needed to restock without having the fear to overstock? This is where the Inventory Turnover Ratio makes a debut. And especially if you are a small business, beware, a shortage of goods is not something you even want in your records.īut let’s think about it this way. One of the common reasons for that to occur would be a shortage of inventories. In a business, failing to keep up with the customer's demand is the biggest nightmare. Note: To find your inventory (classified as a current asset), all you need to check is your company’s Balance Sheet. You can find more about inventory management and inventory accounting. As we begin to learn about the Inventory Turnover Ratio, you will explore in detail what it has in store for you, so stay alert! It refers to the available stock of resources required in various stages of production. Inventory is the accounting of raw materials or components an organization uses to further produce goods or sell the raw materials. But before we move on, let’s understand what we mean by inventory. So, let’s learn more about Inventory Turnover Ratio and its benefits. Inventory turnover ratio is one of the most important ratios in the list of financial ratios that help you examine your financial health efficiently. The Inventory Turnover Ratio can help you track, optimize and manage resource consumption. Be it the manufacturing, selling, or restocking of goods. Moreover, when you are wheeling and dealing with a myriad of resources, it is essential to keep an account of everything. What you must also do is evaluate how often the resources are replaced. So, monitoring your company's revenue is not enough. The success of any business is marked by how efficiently and effectively the company resources are utilized.
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