How do I calculate inventory turnover ratio? As such, calculating the inventory turnover ratio is an important part of financial analysis activities. A lower inventory turnover ratio for example, can provide valuable insights on problem areas that you can work on fixing, says Iswaran, such as avoiding overstocking, ensuring product fit, selling to the right customers and setting reasonable prices. Tracking the inventory turnover ratio therefore allows business owners to identify whether they need to make adjustments to pricing, marketing or other areas to increase sales or better manage stock levels. But at the same time, having a surplus of products that cannot be sold means that cash, which could be invested elsewhere in the business, is being locked away in unsold products and storage costs.
Why is inventory turnover ratio important?īusinesses can miss out on potential sales if there is not enough inventory. One complete turnover of inventory means a company has sold all of the stock it has purchased. It considers the amount of time that passes from the day an item is purchased as stock by a company, until it is sold to the end consumer or client. Inventory turnover refers to how fast or how many times you can sell your products over a given time period, and is a measure of how efficiently a company manages its stock.
#Inventory rate turnover formula how to
Here’s a closer look at what the inventory turnover ratio means, how to calculate it and, importantly, how to improve it. Monitoring how much stock you sell and how quickly can support business owners in more effectively managing stock levels against demand and ensuring its sales and marketing activities are working. “Inventory turnover ratio provides insights into your sales, marketing, pricing, product demand and purchasing,” says Sivaramakrishnan Iswaran, global head of finance and operations at inventory management software business, Zoho.
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