What is an inventory turn4/3/2024 ![]() That’s before we’ve considered the increased risk of losing inventory to obsolescence. And, if you need more warehouse space, that won’t come cheap. But it’ll also increase the storage and holding costs. And that can come with pitfalls aplenty.įirstly, it’ll tie up your working capital. If your inventory turnover rate is low, you might be holding on to too much stock. Top tip: Check our blog on working capital to find out how you can optimise your investment in stock to improve your ROI and ensure a healthier cash flow. You’ll have more cash in the bank, be able to spot and take advantage of more growth opportunities and pay off debts faster too, decreasing interest and making things look all the rosier. This, in turn, will improve your cash flow, speed up your cash-to-cash cycle and make your Profit & Loss Statement nicer reading. However, if you are holding more stock than you really need, it might be the opposite.Īfterall, the longer that stock sits in your warehouse, the longer you have to wait until you see your original investment again.Ī higher stock turnover rate suggests that your inventory management approach is more effective at converting stock into cash.Īnd naturally, selling an item in a quicker fashion means you receive the money from that sale faster too. You might think having stock in situ, ready and waiting to get sold is a benefit to business. However, here are 3 of the most important reasons you should utilise the Inventory Turnover formula: Your inventory turnover can reveal lots of telling things about your business. Your inventory turnover rate will give you this picture. Why is inventory turnover important?īeing able to get an instant snapshot of your company’s efficiency should always be welcomed. Although, it’s important to note that inventory turnover is based on an average. Now, we could apply the inventory turnover ratio to your entire assortment, individual product categories or even to a specific SKU. ![]() Read on to the next section to find out more. Of course, this is not always the case (and we’ll talk more about this later) but in essence inventory turnover is a very handy ratio indeed. Either you need to light a fire in the sales team, or you have excess inventory you can’t shift. On the other hand, a lower rate of inventory turnover number, or ratio, would show the opposite. Let’s make it easy and logical, and say it’s over a 12 month period.Ī higher inventory turnover ratio would indicate a better sales strategy and a more efficient approach to inventory management. ![]() You can calculate your rate of inventory turnover by dividing the cost of goods sold by the average inventory value. How many times have you sold and replaced your inventory during a specific period? However, this powerful formula can reveal some critical information about the health of your supply chain processes. And we’ll even explore some practical strategies to make your inventory turnover faster. ![]() We’ll delve into what a ‘good’ Inventory turnover rate looks like. We’ll talk about how you can use your inventory turnover to assess efficiency. Throughout this blog, we’ll tell you everything you need to know about inventory turnover. To make sure it’s anywhere close to achievable, you need to make every pound you spend count. Therefore, when it comes to inventory levels, less is more. And crucially, the highest profits you can muster, from the smallest amount of stock. You want the maximum value you can achieve. So, how can you work your inventory as hard as possible? How can you reap the rewards from every penny you invest? And how do you make sure your inventory makes money, not drains it? Supply chain inefficiency will kill your results and your bank balance. Managed poorly, however, your inventory is nothing more than a big hole in the business where money’s shovelled in, like a steam train using bank notes to run up a mountain. But only if it’s managed in the right way. Manage it well and you will unlock all the riches you and your Finance Director desire. Your inventory could be an untapped goldmine. How inventory turnover can boost your bottom line
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