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In case any of your products become outdated, you’ll have to identify and remove them from your inventory and warehouse.ĭata integration and analysis. This enables businesses to redistribute stocks to other warehouse locations that are experiencing higher demand for those products. Past performance and product demand can help you determine possible future trends while taking into account the possibility of change in product demand. Managers use advanced technology and software like warehouse management systems (WMS), enterprise resource planning (ERP) tools, and inventory optimization software to monitor inventory turnover down to individual items.Īn inventory optimization platform can help keep costs low and help you with:ĭemand forecasting. These retail tools enable you to monitor your inventory and generate reports that give you useful insights about how your stock is performing. Make sure that you equip your business with a good point-of-sale and inventory management system that offers real-time tracking of sales and inventory levels. Here are some ways you can improve the profitability and performance of your inventory:īefore you begin improving your inventory turnover, you’ll need to measure it.
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4 Ways Businesses Can Improve Their Inventory Turnover
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For instance, if your company is turning over its inventory 10 times per year, that indicates your purchasing levels are low, which causes products to sell quickly. However, it’s important to note that a higher turnover ratio can also be bad for business. Generally speaking, the higher the inventory turnover rate, the better your business is performing. The optimal inventory turnover ratio range is between 2 and 4.Ī lower inventory turnover number often means inefficient sales staff or a decline in product demand. This indicates that the company is performing inefficiently in purchasing, sales, and marketing areas or there is a macro-economic factor responsible (such as economic slowdown). Its inventory turnover ratio is 0.375, which means that company B is spending too many dollars on holding stock and goods are moving slowly. Inventory Turnover = $300,000 in sales/$800,000 worth of goods per year = 0.375 This means that during that year, company A replenished its inventory eight times.Įxample #2: Company B’s sales for one year are $300,000 worth of goods and holds an average inventory of $800,000. Inventory Turnover = $600,000 in sales/$75,000 worth of inventory = 8 Inventory Turnover = Cost of Goods Sold (COGS)/Average Value of InventoryĮxample #1: For example, if company A’s annual inventory amount is $75,000 worth of goods and annual sales are $600,000, its average inventory turnover will be eight times. Next, let’s look at the formula for calculating the inventory turnover ratio and some examples: This measurement gives you insights about what products you need to order, which items need to go on sale, and which ones you should order in advance by taking into account the manufacturing, production, and shipping phases. By carefully tracking inventory turnover, you’ll be able to make better purchasing decisions and fulfill customer orders. If your inventory sells quickly, they’ll be more willing to provide you with a loan (with your inventory as collateral). This number also gives banks an idea about the liquidity of your assets. Inventory turnover ratio is an important metric to help you manage and grow your company. Here’s why tracking inventory turnover matters for your business: If you analyze inventory data over a year, you’ll observe the highs and lows in trends due to changes in product demand. For accounting purposes, it’s calculated for one year, but you can also determine it on a month-to-month or quarterly basis.īy calculating the average inventory for one year, you’re able to get a better idea about how your business is performing financially. Inventory turnover is referred to as the number of times a business sells its inventory per year. In this article, we’ll explain what the inventory turnover ratio is and how you can work toward improving it. One way to determine the “right amount” is by calculating and tracking a metric called inventory turnover ratio.
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Similarly, if it’s too low, you can potentially miss out on sales. If the stock you have on hand is too much, you’ll end up overspending in storage costs. This is what inventory management is all about: finding out how much inventory you should be holding at any given time. Retail businesses looking for ways to boost their sales and improve their bottom line can benefit from better managing their inventory and finding out how much stock they should hold.