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These cookies ensure basic functionalities and security features of the website, anonymously. Necessary cookies are absolutely essential for the website to function properly. Drop us a line today and see how we can help. Need help managing inventory? Sekure's range of hardware and software solutions, including Payanywhere's business management tools, can help you run your business seamlessly and manage inventory across channels. For example, you might be holding your inventory for too long, or your IRT might be out of line with your industry average. Conclusion Now that you have a handle on the inventory turnover ratio, dig a little deeper into your numbers to gain insights and explore areas for improvement. Flexibility: If your inventory churns quickly, you will be better positioned to respond to shifting trends and customer preferences. Try leveraging this situation to negotiate lower wholesale orders or price drops for bulk orders. Supplier bargaining power: High inventory churn means that your suppliers are also benefitting from higher sales. Why Inventory Turnover Is Good A high inventory turnover presents several advantages: Reduced holding costs: If you're ripping through inventory, then you're limiting your holding costs, i.e., insurance, rent, utilities, and other associated expenses. Likewise, a low ratio could mean that you have too much inventory, or perhaps even that you have overstated the value of your stock (i.e., the higher denominator in the equation would yield a lower ratio). If this is the case, you may have to consider marking down products to get sales out the door. A low ratio could mean that you have a large backlog of unsalable inventory. However, if your ratio is too high, you might have issues with lost sales due to shortages. As a result, it's unlikely that you'll be caught with unsold inventory in the event of a downturn or a drop in demand for your products. A high or above-average ratio usually means that your business has a good balance between inventory and sales volume. For example, a bakery would have a much higher turnover ratio than, say, a car dealership. Stores with more specialized or costlier products will generally have a lower ratio. What Inventory Turnover Ratio Tells You Inventory turnover ratios differ from industry to industry, so if you're comparing, make sure it's an apples-to-apples comparison. If you want to know how many days it takes, simply divide 365 by your ratio:ģ65/5 = 73 days Therefore, you are selling and replacing your inventory once every 73 days. $60,000/$12,000 = 5 In this case, your inventory turnover ratio is 5, which means that you turn your inventory over 5 times a year. In the equation below, note that “cost of sales” and “cost of goods sold” (COGS) are interchangeable. How to Calculate Your Inventory Turnover Ratio The formula for determining your ITR is simple. And inventory churn means you are selling, which means you are generating gross profit. A higher ratio corresponds to a higher frequency of inventory turnover. In short, the ITR indicates how well a business's inventory matches its sales volume. What Is an Inventory Turnover Ratio? The inventory turnover ratio (ITR) is an operating performance ratio that measures how many times a business's inventory is turned over in a given period (usually a year, but it may also be expressed in days). This post provides an overview of inventory turnover and what makes it an important metric. For some other KPIs, check out Sekure's recent article on the subject. If you're a business owner, at some point you've likely asked yourself, “What is a good inventory turnover ratio?” Indeed, it's one of the most common and essential key performance indicators (KPIs) for businesses.