Order items in smaller quantities, but more frequently.Īnother way of how to make your inventory turnover more efficient is to set up the respective reorder point and safety stock values in your system. This will allow you to accurately calculate your reorder point and safety stock values to make sure that the high-selling items are always on hand and that your inventory turnover is stable. It’s also important to define the high-selling items. This will optimize your inventory turnover rate. Conduct research to find out why they are not selling and maybe adjust the prices or just remove those products from your stock. Identify products that sell slowly or don’t sell at all. You can also take into account such factors as seasons, currency fluctuations, special events, and more as they apply to your industry. This will help you more accurately define prices, sales behavior, availability, and other characteristics. Group your items by various criteria, such as manufacturers or raw materials used. Here are some other management methods that can help you improve your turnover right away: Divide your inventory into groups. To start, you should be constantly monitoring your inventory turnover. Therefore, the ratio should be based on specifics of your business. A sushi restaurant will sell more shrimp tempura rolls than your local electronics shop moves Macbooks. For example, companies that sell food have a higher inventory turnover rate than those who sell computers and computer peripherals. What is a good inventory turnover ratio ? That is not good, considering the average turnover ratio in retail clothing sits at around 4 times per year. This means that your company replenished its inventory. Using the formula above you would find that your Inventory Turnover Ratio would be: Your reported cost of goods sold is $400,000 through a year. Next you would calculate your inventory turnover. In the beginning of the year, your T-shirt company’s inventory was $700,000, and at the end of the year your inventory is $200,000. In this example, let’s use the start and end of the year as your timeframe. The formula looks like this:Ĭheck out the balance sheets at the start and end of the year or quarter, or whatever time period you use as a base. You just need to add up beginning inventory and ending inventory, then divide the result by two. The focus here will be on the second method, the more efficient inventory turnover equation:īefore you can do this, you need to know how to calculate average inventory. The second method is more accurate, because it uses the actual cost of goods and also considers possible seasonal fluctuations in sales. Some businesses just divide the overall sales by inventory, whereas other businesses divide the cost of goods sold by average inventory. How to Calculate Inventory Turnover RatioĪ large part of calculating your inventory turnover ratio formula depends on your business model. So, first let’s take a look at this magic inventory turnover formula that will help you streamline your business and achieve best results. At the same time, good inventory turnover ratio means that you are not overselling your projections, which could lead to inventory shortages. By evaluating inventory turnover closely, you can point out possible areas of improvement for your overall business model.Ī good inventory turnover ratio ensures that you do not have redundant inventory, meaning inventory that is not sold and just occupies your valuable storage space. It is one of the most important aspects of inventory management that shows how efficiently you manage your inventory. What does inventory turnover mean for your business?Īctually, it means quite a lot. For better inventory turnover, the company should sell more than it purchases to avoid overhead costs for storage. Basically, the inventory turnover ratio depends on the amount of purchases and sales. It is a figure that defines how many times your inventory is sold or replaced within a specific time period, such as a quarter or a year. First, it’s important to understand what inventory turnover is in plain terms.
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