Inventory Turnover 101: How To Understand Your Inventory Efficiency
May 27, 2024
Are you ready to learn how to calculate your inventory turnover? Because if you have your own business, optimizing and maximizing your operations and profit margin all comes down to this metric.
What is Inventory Turnover?
Inventory turnover is the heartbeat of your company – it tells you how fast you are selling your inventory and how fast it takes you to sell and replace your inventory so that you can maximize your efficiency.
To make it easy to understand Inventory Turnover 101, let's break it down:
How do you calculate inventory turnover?
It is simple:
Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory Value
For instance, lets say your COGS for the year is $200,000, and your average inventory value for the same year is $50,000; then you have a ratio of: Inventory Turnover Ratio = 200,000, divided by 50,000 = 4
What does it mean?
A better ratio would be 4 which is quicker in your selling inventory. This means less money tied in your inventory in general and more cashflow. A lower ratio, for example, a 2, might indicate slow-moving inventory, which needs attention or changes in your business.
Why does it matter?
Because understanding your inventory turnover:
- you can manage inventory levels better;
- you can reduce your storage services costs;
- you can avoid overstock or 'out of stock' situations;
- you can improve your cash flow and maximize your profitability.
How can you optimize Inventory Turnover?
- track the trends in your demand and make inventory adjustments accordingly;
- use lean inventory and just-in-time ordering practices with your supplier to decrease lead times;
- focus on high-demand items and optimize your product mix.
Inventory Turnover 101
The Takeaway Inventory turnover is the key metric any business should have in their bag of tricks to streamline their operations and maximize their profitability; and once you have learned how to master inventory turnover, you will be in a better position to make decisions in your business and run it more efficiently.
Are you ready to learn how to maximize your inventory turnover? Your inventory will thank you for it! Author Jose Borghi is the CEO of Inventory Science, an inventory management practice that works with businesses to optimize their inventory turnover and better manage warehouses to increase their bottom line. Have you met The Gram Within you, yet?
