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Inventory in many business models are kept as collateral for loan sanctions, hence inventory trackers are very important in getting financial support for your firm. Often banks consider Inventory turnover ratio as a measure of how easily your inventory can be sold and how quick you can make a profit for your business. Inventory turnover ratio is one of the key performance indicators (KPI) for a growing business. If you’re still not measuring inventory turnover for your business, here are a couple of reasons you should be doing it on a regular basis:. Why do you need to measure inventory turnover? Let’s discuss the top four queries to understand inventory turnovers better.ġ. Stock inventory turnover also indicates the briskness of the business.Ī lot of people have some basic queries related to inventory turnover and how it will be useful in our business model. The cost of sales is taken into account to be more realistic because the difference in the sales and cost of sales are recorded. A high turnover rate might indicate inadequate levels of inventory, which can result in a loss in business because the inventory is low. If the inventory is popping over slowly, then the prices of warehouse attribution to every unit are higher. These improper value of inventory turnover ratio will be of no use for your business management.Īpplications of Inventory turnover in business:Ī low turnover ratio will point to overstocking, obsolescence, or deficiencies within the marketing effort. If you assess one company using the cost of sales in the calculation, and the other using total sales, you’ll have an inconsistent and faulty comparison. When using the inventory turn ratio to compare companies within an industry, we need to make sure we are using ratios calculated on the same basis. Point to note here is that some of the companies use cost of goods sold, instead of annual sales while calculating the inventory tracker value. Where: Average Inventory=(BI – Ending Inventory) ÷ 2 Inventory Turnover = Annual Sales / Average inventory for a period. of days in a given period by the inventory turnover formula to calculate the days it would take to sell inventory in hand.Ĭalculating inventory turnover helps businesses in making better choices and do futuristic inventory planning on pricing, manufacturing, marketing and purchasing of new stock in demand.

In other words, it is a ratio depicting how many times an organization has sold and replaced inventory during a given period of time.

Inventory turnover is the ratio, to give an insight into the efficiency a company has, both absolute and relative while converting it’s cash into sales and business revenue.