{"id":6762,"date":"2021-09-14T13:38:28","date_gmt":"2021-09-14T13:38:28","guid":{"rendered":"https:\/\/tacticalarbitrage.spacecolts.com\/what-is-a-good-inventory-turnover-ratio\/"},"modified":"2024-03-26T19:58:00","modified_gmt":"2024-03-26T19:58:00","slug":"what-is-a-good-inventory-turnover-ratio","status":"publish","type":"post","link":"https:\/\/tacticalarbitrage.com\/blog\/what-is-a-good-inventory-turnover-ratio\/","title":{"rendered":"What Is a Good Inventory Turnover Ratio & 20 Tips to Improve It"},"content":{"rendered":"

How effective is your inventory management?<\/span><\/p>\n

In this article, we walk you through all you need to know about inventory turnover and give you 20 tips on how you can improve it.<\/span><\/p>\n

What is Inventory Turnover & Why It Is Important?\u00a0<\/span><\/h2>\n

Inventory turnover is a financial calculation that shows the number of times a business sold and replaced inventory or products during a particular period of time.\u00a0<\/span><\/p>\n

It\u2019s a useful efficiency measure used to indicate the effectiveness of a business in managing its inventory. Simply put, inventory turnover<\/a> measures the sales and inventory efficiency of a business.<\/span><\/p>\n

By showing how much it sells as a proportion to its overall inventory, a company can make informed decisions on purchasing, marketing, profit margin, and selling products that customers want.<\/span><\/p>\n

Inventory turnover is an important key performance indicator that can help you grow and manage your business.\u00a0<\/span><\/p>\n

What Is a Good Inventory Turnover Ratio?\u00a0<\/span><\/h2>\n

A good inventory turnover ratio is dependent on your specific business, average inventory value, and inventory strategy. However, businesses should strive to maintain a high inventory turnover ratio while considering the potential supply concerns and the sales forecast accuracy.<\/span><\/p>\n

Why you might ask?<\/span><\/p>\n

As a retailer, you never want to have inventory sitting on the shelf for long periods of time. Having a low inventory turnover ratio ties up your capital and restricts your ability to find new items to sell and lost sales. Instead, you want inventory to be flying off the shelves.\u00a0<\/span><\/p>\n

Generally, inventory turnover ratios between 4 and 6 is an ideal inventory turnover ratio as it indicates an optimal balance between inventory for sales and replenishment.\u00a0<\/span><\/p>\n

This favorable ratio will ensure that you neither run out of products nor have too much unsold stock clogging up your storage space.\u00a0<\/span><\/p>\n

A high inventory turnover ratio indicates great sales performance while a low one shows poor sales success.<\/span><\/p>\n

How To Calculate Your Inventory Turnover?\u00a0<\/span><\/h2>\n

To compute the inventory turnover ratio, you simply need to divide the cost of goods sold by the average inventory over a given time.<\/span><\/p>\n

Inventory Turnover Formula<\/span><\/h3>\n

Inventory turnover = cost of goods sold (COGS) \/ Average inventory (AI)<\/b><\/p>\n

To get this, you will need to understand and calculate these two components properly.<\/span><\/p>\n

Cost of goods sold: This represents the cost of making your sold products and includes labor, materials, advertisement, marketing, distribution, plus any other indirect or direct costs associated with the products.<\/span><\/p>\n

You can get the cost of goods from the annual income statement or calculate it from the balance sheet as follows (I know, I know, accounting sucks, but the numbers are where you can make a ton of money):<\/span><\/p>\n

COGS = Beginning inventory + Purchases for the period – Closing inventory<\/b><\/p>\n

Average inventory (AI):<\/b> This is the average (or mean) value of the starting and closing inventory for a certain period calculated as follows:<\/span><\/p>\n

AI = Beginning inventory + Closing inventory \/ 2<\/b><\/p>\n

Then it\u2019s just simple math and you have your inventory turnover ratio.\u00a0<\/span><\/p>\n

20 Tips on Improving Your Inventory Turnover\u00a0<\/span><\/h2>\n

1. Better Forecasting\u00a0<\/span><\/h3>\n

Different products have different popularity. When estimating customer demand for your products, note the seasonal and occasional products plus fashion trends and how they impact your inventory.\u00a0<\/span><\/p>\n

More importantly, examine your past sales data to identify the products which are selling best and have trended higher in different sales channels.\u00a0<\/span><\/p>\n

Ensure you incorporate this information in your sales forecast and budget.<\/span><\/p>\n

The better you are at forecasting the demand for your products and when they want the demand met, the less inventory you will need to stock and the higher your inventory turnover rate will be.<\/span><\/p>\n

2. Identify Your Benchmarks<\/span><\/h3>\n

Knowing your inventory turnover number is undoubtedly essential. But, being aware of how your business compares to similar ones in the industry is even more helpful.\u00a0<\/span><\/p>\n

Seek to find out how other businesses in your specific industry perform and compare this with your performance to know if you\u2019re in line with your industry\u2019s average.<\/span><\/p>\n

If you are far below, then it may mean that your inventory isn\u2019t moving as quickly as it should and is considered too much inventory or insufficient inventory.<\/span><\/p>\n

3. Increase the Demand For Your Products<\/span><\/h3>\n

Low demand for your products results in low sales and consequently low inventory turnover. Increasing your sales will improve your inventory turnover. You will need to formulate effective marketing strategies to increase the demand for your products<\/a> and drive sales.<\/span><\/p>\n

You can make use of marketing campaigns that focus on advertisements or have promotional events and offers. To reach new markets, you can also utilize various available marketing mediums such as content marketing, email marketing, social media, and paid advertisements.<\/span><\/p>\n

Well-targeted, well-designed, and cost-effective marketing efforts can help increase sales and improve the turnover ratio.\u00a0<\/span><\/p>\n

4. Evaluate Your Pricing Strategy<\/span><\/h3>\n

At times, your product pricing may be the culprit for low sales and low turnover. Pricing your products too high in a bid to get a good return on investments and ensure consistent profitability may be detrimental to your sales.<\/span><\/p>\n

So it might be a good idea to lower your price if you aren\u2019t selling a lot of your inventory.<\/span><\/p>\n

You will need to factor in all the factors that influence the value, including raw materials, staff costs, processing costs, and competitors\u2019 rates while formulating an effective pricing strategy.<\/span><\/p>\n

Also, consider using multiple strategies based on seasonal pricing, volume discounts, and shipping costs.<\/span><\/p>\n

5. Invest in a Robust Inventory Management Software<\/span><\/h3>\n

For you to maximize your inventory turnover, you will need to measure it first. As such, it\u2019s critical to equip your business with a good inventory management system that allows you to track sales and inventory levels in real-time.<\/span><\/p>\n

For Amazon sellers, Inventory Labs is a great option. There are also other options out there on the market.<\/span><\/p>\n

6. Encourage Sale of Old Inventory and Eliminate Safety Stock<\/span><\/h3>\n

Try as much as possible to avoid keeping old stock with little demand as they put a strain on your inventory. If for any reason you find yourself with these products, provide promotions and special discounts to help you sell them as quickly as possible.<\/span><\/p>\n

You can also launch specific marketing efforts aimed at getting rid of excess inventory. Disposing of old inventory through sales and markdowns and channeling the returns in high-turnover, faster-moving products will help you reduce inventory holding costs.<\/span><\/p>\n

7. Efficient Replenishment<\/span><\/h3>\n

Stocking your most popular products in large amounts may be a wise strategy for running your sales cycle smoothly. However, of more importance is efficient replenishment.<\/span><\/p>\n

Rather than buying huge quantities of products that sell fast, leading to overstocking, it\u2019s ideal to stock smaller amounts more frequently.<\/span><\/p>\n

It lets you order new products just before the current ones sell out, keeping your business running smoothly and avoiding overstocking.<\/span><\/p>\n

You can utilize automated inventory reorder, usually based on historical data. Proper and effective inventory replenishment can help you prevent both overstocking and understocking, which affects turnover.<\/span><\/p>\n

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8. Focus on Best-Selling Products<\/span><\/h3>\n

It\u2019s critical for your turnover and business as a whole to have a stock of products that are high in demand. Investing in low-demand products will affect the overall turnover of your business.\u00a0<\/span><\/p>\n

As such, you need to identify your top-selling products and make demand-driven purchasing. A good forecast can assist you in determining which items sell quickly and which items you should stock up on in the future.<\/span><\/p>\n

Apply the 80:20 Pareto principle and invest primarily in the 20% of items that generate 80% of the profit. To improve the company\u2019s overall inventory turnover, eliminate products with poor turnover ratios.<\/span><\/p>\n

9. Deal With Dead Stock<\/span><\/h3>\n

To get rid of dead stock, you can do the following:<\/span><\/p>\n