Inventory turnover is a ratio indicating how many times a business has replaced and sold inventory over a particular period. A business may then divide by the inventory turnover ratio to calculate how many days it actually takes to replenish the inventory on hand. Higher inventory turnover means that a business is selling more products than it is buying. It is important to keep this ratio as high as possible.
But how do you determine if your inventory turnover is good or bad? One of the main factors that go into determining this is your profit margins. If you are losing money on every sale you need to improve this ratio if you want to improve your profitability. Controlling the number of turns sold per day is just one way to increase profits.
Inventory turnover can also be influenced by many other factors. The total number of days sold is only one of these factors. It may actually be the percentage of total days sold that have been replaced inventory. Inventory turnover can also be influenced by whether a business is experiencing any type of growth. If the business is expanding then there are more days that have been turned over than have actually been sold. In order to improve profitability you must improve this ratio.
Other elements that can impact inventory turnover are the age of the consumer goods that are being sold. Generally, products sold in the past are sold more cheaply than those being sold today. As a result, consumers will typically purchase items that are no longer new. When a business is experiencing a drop in sales because of this trend, they may want to consider cutting back on advertising. A drop in profit can lead to increased inventory turnover.
The last factor, customer service, is often a key determinant for profitability. If a customer is simply unhappy with the quality or service of a product then they are going to likely be turned away from your store. This can directly impact inventory turnover since it is likely that customers who are turned away from your business are not going to return and purchase products. In order to improve profitability when it comes to customer service, you must always keep up with what customers are asking for and work to provide them with the products that they need.
In order to calculate the inventory turnover ratio for your business, you will first need to know how much inventory has been replaced during recent years. Next, you will want to know how much inventory has been sold and the average number of days that new items were turned over. Finally, you will need to determine how much of an increase in profits has resulted from these factors. Once you have all of these numbers you can calculate your ideal inventory turnover ratio. By following this formula you will be able to quickly determine how well your business is performing financially and how to improve it.
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