Depending on your situation, by increasing your product selection, you may be able to increase your overall sales. This can also help you reach new customers looking for more products. The average inventory is calculated by adding the beginning and ending inventory values for a given period and dividing the sum by two. This article will explore the art of higher inventory turnover and provide 14 easy strategies to achieve it. The average inventory is the mean of inventories computed for a specified financial period.

In today’s fast-paced business world, maintaining the right inventory levels is crucial for any organization. The Inventory Turnover Ratio plays a vital role in ensuring that businesses are managing their stock efficiently and effectively. The key is to make sure that your whole inventory covers customer demands without lingering on shelves (upping storage costs). The “perfect” inventory turnover ratio depends on your business. Inventory turnover can give valuable information about the health of your business. More specifically, it’s the number of days that go by from the day your company purchases the inventory until that same inventory is sold to your customers.

In order to increase sales—and therefore profits—while managing your warehousing and inventory capacity, it’s absolutely vital to get your stock orders just right. Inventory turnover is an essential inventory management metric that helps you do just that. To calculate inventory turnover ratio, you look at two key pieces of data. These metrics should be easy to find in your business’s income statement, your profit and loss statement, or in your customer relationship management software (CRM). It’s important to note that inventory turnover ratios are usually calculated at the SKU level but can also be aggregated to find the turnover rate for your entire stock.

Challenges in Achieving Higher Inventory Turns

Using inventory management software is essential to optimizing inventory turnover rates. Inventory management software can help wholesalers to manage inventory levels, automate replenishment processes, and track sales trends. This can help to reduce the risk of overstocking, minimize holding costs, and improve inventory turnover rates. Calculating the inventory turnover ratio at a product category level helps wholesalers evaluate market trends and customer demand. Wholesalers can analyze their sales data to identify which products are selling quickly and which are not.

Look at recent global supply chain hiccups; no one saw them coming. Low-margin industries tend to have higher ratios than high-margin industries, so always compare yourself to brands within your vertical. Your balance sheet will tell you the COGS, the value of your beginning and ending inventory, and your annual sales figures.

• Instead, each has challenges and requirements that determine the best level.
• By pricing products competitively, wholesalers can increase demand and improve inventory turnover rates.
• It’ll highlight areas to improve and provide hints on where to optimise.
• Regularly analyze your sales by product type and by individual stock-keeping unit (SKU) to determine which items are most profitable.
• A well-managed supply chain can help wholesalers streamline their procurement processes, reduce lead times, and minimize inventory carrying costs.

With a well-balanced supply-and-demand chain, your business should be able to stay in the clear. Understanding your inventory turnover is a one-way ticket to increased profitability. This key performance indicator (KPI) is one of the single most important retail growth indicators as increasing your inventory turnover drives profit. Businesses with high inventory turnover enjoy reduced holding costs and can respond with far greater agility to evolving customer demands. To do that, you’ll need to calculate your inventory turnover ratio.

What is Inventory Turnover Ratio?

A higher ratio indicates that you are selling through products quickly while a lower ratio may suggest overstocking or slower sales. Calculating your inventory turnover ratio is a crucial step in understanding the efficiency of your supply chain. This ratio helps you determine how quickly you are selling and replacing goods within a specific period, usually a year. Inventory Turnover Ratio is a metric that measures the number of times inventory is sold and replaced over a specific period. This ratio provides insights into how efficiently a company manages its inventory to meet customer demand while minimizing obsolete stock. Keeping a record of your inventory turnover ratios and how they change can help support business decision-making.

How do you calculate inventory turnover ratio?

Strengthen your supply chain to avoid those annoying late deliveries. Regularly review your supply chain and what is the difference between operating and non gather data at each phase. This helps gauge efficiency and keeps a close eye on your retail inventory.

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Product kitting or bundling is a common inventory management technique that can boost inventory turnover. This strategy gives customers a better deal if they buy items as a set, which encourages them to buy more products. If the deal encourages enough customers to spend more money and buy more products, your turnover rate can increase. This technique is especially helpful for a retailer trying to move products before demand drops off and to prevent merchandise from becoming dead stock. This inventory turnover ratio of 2 indicates that the company sells through its stock of inventory in six months. In times of reliable and shorter lead times, just-in-time (JIT) inventory management can help you balance inventory levels with customer demand.

Let’s say a company has a COGS of $100 million and an average inventory of $125 million. The cost of goods sold includes all expenses related to the production of your company’s goods or services. This can include materials costs, labor expenses, utilities, and more. This number can also be expressed in units to calculate inventory usage rate.

Apparel and perishable goods, for example, will turn faster than automobiles; fast fashion will turn faster than luxury fashion. Remember that when you’ve got solid ratios on your side, opportunities open up. A significantly high turnover can also indicate ineffective purchasing or low inventory, which leads to increased back orders and less sales. Think of your inventory as the unsung hero, often overshadowed by pricier assets like buildings or machinery. When you spot an ITR of 12, it’s hinting that your inventory completes a full cycle—sells out and restocks—every month. These two account balances are then divided in half to obtain the average cost of goods resulting in sales.

Why is Calculating the Inventory Turnover Ratio Important?

Calculating inventory turnover ratio helps you make business decisions about pricing, purchasing, marketing, and more. Because inventory turnover ratios differ between industries, don’t hold yourself to an irrelevant standard. Calculate your inventory turnover ratio regularly and compare it against past results to gauge progress. Most businesses calculate inventory turnover ratio using automated inventory management platforms. How to calculate inventory turnover ratio is usually built into that type of software. If you’re not selling your stock, you’re not bringing in revenue to cover your operating costs, turn a profit and—crucially—buy new stock.

Examine whether your prices might be too low and if that’s impacting your profitability.Inventory turnover ratio can tell you at a glance how much you’re selling and how quickly. So stay on top of it to keep the right amount of stock on the shelves and keep shoppers happy. The basic formula for COGS starts with the cost of inventory at the beginning of the year, adds in purchases and other costs, and subtracts the inventory value at the end of the year. For example, say you started with $20,000 worth of inventory. Your total cost of stock purchased plus warehousing costs was $7,000. At the end of the fiscal year, you had $18,000 worth of products.

Here are some key factors that affect inventory turnover for wholesalers. It implies that Walmart can more efficiently sell the inventory it buys. In addition, it may show that Walmart is not overspending on inventory purchases and is not incurring high storage and holding costs compared to Target.

The ideal inventory turnover for an e-commerce business is an annual ratio between 4 and 6. Having strong visibility into inventory turnover is helpful for a handful of reasons. Inventory turnover ratios can inform how you forecast sales for your business and reveal cracks in your inventory management processes. And once you get a handle on a few numbers, the ratio is easy to calculate. Using the average value of stock in the inventory turnover formula accounts for seasonal changes. The simplest way to calculate average inventory is to take your beginning inventory plus your ending inventory balance and divide that figure by 2.