How to calculate your business’s inventory turnover? Good inbound and outbound management of your business’ products can generate excellent results, from more efficient deliveries to reduced workflow costs. Among several strategies that can cause this, we will highlight the incentive to inventory turnover.
Want to know how this concept works? How important is it? How to calculate it and tips to control it in your company? So read on and check out this complete text we’ve prepared for you.
How To Calculate Your Business’s Inventory Turnover?
What is business’s inventory turnover?
As the name implies, inventory turnover is a strategy focused on logistics; which aims to systematically analyze and monitor everything that enters and leaves the shelves, taking into account:
- product type;
- delivery times from suppliers, to understand when the replenishment of raw materials and products will be;
- storage time;
- movement volume, among others.
So how to calculate your business’s inventory turnover? In general, the calculation considers the total sales made, the volume of products stored, and a determined period.
The account is made through variable cycles, which correspond to the specifics of each business and the issue being analyzed. Thus, it is possible to carry out the analysis periodically, considering the deadlines that managers determine.
Importance and benefits of inventory turnover
First, it is worth noting that it is essential that entrepreneurs know how their stock levels are, understanding which items have been renewed, sold, or what is stuck.
Based on the inventory turnover calculation results, the entrepreneur can design sales action strategies, avoid possible losses, forecast replenishment; and understand a little more about the demands.
It is necessary to understand how product turnover works, how fast the inventory is renewed, and how long it takes to store each item. In this sense, inventory turnover analysis is a crucial method to assess the company’s management and the balance of the sale.
Even bad inventory management generates several harms that can even cause the business to go bankrupt if they continue for a long time.
After all, stock stopped for a long time in the company means wasting money with unnecessary expenses, such as cleaning, risk of loss, conservation, breakage, storage, and loss of validity.
All of this ends up generating losses for the organization, negatively impacting the company’s capital.
How to calculate your business’ inventory turnover?
Inventory turnover calculation is usually performed taking into account a specific period. For this, the company must have strict control over its storage. In addition, inventory turnover is essential to balance the company’s production flow.
To calculate it is very simple. Just divide the number of units that were sold in a given period by the average inventory volume. This period may be the one that best adapts to the company’s demands, but it is worth mentioning that the invoice is usually annual.
Another point is that this analysis allows us to calculate how the return on the invested amount is. In other words, understand if the value that the company demands its purchases generates the expected return.
Here, the operation is also simple. First, divide the margin generated on sales by the average business’s inventory volume over a period that you will analyze the amount invested.
The results of these operations help managers to understand which are the best decisions for their business, such as which products are most worthy of investment. For example, let’s say you have a clothing store and the margin for the “shoes” category is $100K; the average inventory value is $10K.
But if, on the other hand, the margin of the “coat” category is $ 200 thousand and the stock investment was $ 40 thousand, the return is only five times. In other words, it may be more advantageous to bet on the sale of shoes in your store.
Inventory control tips for your company
Now that you have a basic understanding of how inventory turnover control works in your company and how to calculate it, you need to understand how to do it properly.
The focus of the entrepreneur who is carrying out this analysis is to avoid any loss, ensuring that the operation works perfectly. To make this concept a little easier to understand, we have separated two tips; check it out:
Manage your inventory
No matter the level of merchandise stored in your stock. So it would help if you carried out a periodic evaluation to avoid possible problems. Therefore, inventory management is essential for the manager to understand the turnover of products in stock better and better understand the entry and exit of items.
Get a greater understanding of your sales
Companies with a well-established inventory turnover concept can better identify which products have the best sales rate. In other words, they can understand which products the company sold the most. But, for that, it is necessary to have control over all the information of the operations and to monitor them.
Increase business’s inventory
When purchasing goods and raw materials from your supplier, it is necessary to carry out a cash analysis of your business. Therefore, it is essential to know all the numbers of your company to manage stock turnover better.
Therefore, we can conclude that inventory turnover management is necessary for companies that want more excellent organization about their products; and, consequently, achieve better financial results. That’s because, through this analysis, it is possible to eliminate possible unnecessary expenses and focus on what matters.