How to Increase Inventory Turnover with a Simple and Effective Process

What is inventory turnover?

The account of all the products in a company's stock, including raw materials, work-in-progress materials, and finished things that will eventually be sold, is known as inventory.

The number of times a company's inventory is sold and replaced in a given period is known as inventory turnover. As a result, inventory turnover reveals how successfully a company controls its sales-related costs in the given time.

The higher the inventory turnover, the better, because it indicates that a company is selling things swiftly and that there is significant demand for its products. A low turnover ratio, on the other hand, is a sign of sluggish sales and falling demand for a company's goods.

Inventory turnover is a measure of how successfully a company manages its inventory. A company's demand for its products may be overestimated, resulting in the procurement of too many goods. Low turnover would be a symptom of this. In contrast, excessive inventory turnover suggests that there is inadequate inventory and that the company is missing out on sales possibilities.

The turnover rate also indicates whether or not a company's sales and purchasing teams are on the same page. Inventory should, in theory, match sales. Keeping inventory that isn't selling can be costly for businesses. As a result, inventory turnover is a good indicator of sales effectiveness and cost management. Alternatively, employing less inventory for a given quantity of revenue optimizes inventory turnover.

Different types of inventory turnover

Inventory turnover is a measure of how quickly the sales are made and when the inventory is sold. It is important because it can give you an idea of how well your company handles its inventory.

There are three types of inventory turnover ratios- absolute, comparative, and average. Each type has different implications for management, but all are helpful in better decision-making.

Absolute Turnover

Absolute Turnover is the number of goods sold in a given period, expressed as units per day.

Comparative Turnover

Comparative turnover is calculated by dividing the total sales in a given period by the stock on hand at the end of that period.

Average Inventory Turnover (AIV)

Average inventory turnover evaluates how many times goods are sold during a given period and then divides that number by their cost of goods sold (COGS). The average inventory turnover gives an estimate on the time taken for goods to be sold out or to return to their original starting position after being bought.

How to Calculate Inventory Turnover Ratio?

Inventory Turnover Ratio (ITR) shows how much inventory is sold in a certain period and this can be calculated with the help of this turnover formula .

Inventory Turnover Ratio Formula = Cost of Goods Sold / Average Inventory

You need to divide the cost of goods sold with your average inventory to get your inventory turnover.

Cost of goods sold

It is the cost incurred by a company when it makes a product, beginning with the money spent on raw materials and labor. The real quantity of the goods paid by the merchandiser through a supplier or a manufacturer is the cost consideration for a merchandising business. Maintaining an inventory record or a list of raw materials or items acquired properly calculates the cost of goods sold.

Average inventory

It refers to the average cost of items over two or more years. Typically, it considers the beginning and ending inventory levels over time. When calculating the inventory turnover ratio for the entire year, you take inventory at the start of the year and inventory at the end of the year into account.

The average value of the inventory can be calculated by multiplying the beginning and ending inventory values by two.

There is another way of calculating the average inventory. In the first technique, the cost of items sold was used to estimate it. Instead, you can determine the number of sales made.

Since the sales value may not be precise, employing COGS is a more accurate choice. After all, the value does have a markup on occasion.

What factors impacting inventory turnover?

If you are in the business of managing inventory, then you know that a large percentage of your time is spent on understanding how to accurately manage your inventory and make sure it doesn't go out of stock. When it comes to making the best decisions about how you manage your inventory, it's important to understand what factors influence inventory turnover. Here is what makes a difference in managing your inventory and keeping it well-stocked.

Length of distribution channel

Companies tend to keep extra safety stock on hand when their suppliers are located far away. This assures that a reserve of inventory is always available, even if there are delays in receiving goods from these more distant sources.

Fulfillment policy

If management wishes to fill the majority of client orders at once, it will need to keep more stock on hand. This is a strategy issue; if management insists on having a quick fulfilment policy, it should be cognizant of the inventory investment required.

Materials management system

Material requirements planning tends to need more inventory than a pull system, such as the just-in-time system. This is because push systems are based on projections of what will be sold while pulling systems are based on actual consumer orders. As a result of this difference, material requirement planning necessitates greater inventory than does the JIT (just in time) system which relies only on predictions about how much product should be pulled or delivered.

Inventory on consignment

Some corporations keep ownership of their goods at consignee sites, resulting in a higher inventory investment. Otherwise, wholesalers and retailers would have purchased the goods all at once, saving the producer money on inventory.

Purchasing policy

A corporation may purchase huge amounts of raw materials in order to achieve lower bulk pricing, but this will raise its inventory investment. In many circumstances, it's better to pay a little more per unit for smaller buy volumes, which results in a much lower inventory investment. Buying in lesser amounts may not be more expensive because inventory carrying expenses and inventory obsolescence costs are reduced.

Product versions

When a product has multiple variants, each one is often maintained in stock, resulting in higher inventory levels. Another option is to eliminate product versions with low sales, as well as the inventory investment that goes with them. Some of the sales lost as a result of this could be recovered if buyers instead purchase from the remaining product selection.

Drop shipping

A vendor can work up a deal with a supplier to have items delivered directly to a client. The seller maintains no inventory levels at all while using a drop shipment arrangement. However, because the seller has no control over the speed with which the supplier sends items, this may slow down delivery to buyers.

How do you increase your inventory turnover?

For returning customers and a better profit margin one needs to get a higher inventory turnover. You may or may not have a good turnover, but here are a few tips that can help you increase your inventory turnover.

Pick the bestsellers-

Use inventory that sells more and place it strategically in areas where your customers will notice. Strong sale tactics usually work in increasing your business's inventory turnover and decreasing the inventory holding costs .

Get rid of the unsellable-

Just because you have ample storage space does not mean that you'd hold on to inventory that's not selling. Unsellable inventory consumes manpower and eats up the space that can be used for fresh stock.

Price it right-

Right pricing of a product plays an extremely important role in increasing inventory turnover. The goods will sell faster if they are not under or overpriced. To know the right pricing of your product, you could either use the food cost percentage calculator or compare your pricing with your competitors.

Buy in small quantities-

Not stocking up too much can up your inventory turnover as there wouldn't be too much to sell. But this method can be applied only if you have that kind of financing. Not everyone can purchase in small quantities as that would increase the expenses.

Group similar products-

Identify similar products and put them into a separate category. By doing so, you should compare how they are performing. Based on their sales, you will be able to recognize trends. It will even be possible for you to make your inventory calculations correctly.

Invest in automation-

One of the most important things is to invest in an inventory management system as technology can make life easy. If you are planning on picking up an inventory management system, you can go for Zip Inventory. Zip Inventory makes inventory counts easy and mobile. With shelf-to-sheet counts, waste tracking, transfers, and a simple user interface, Zipinventory makes managing inventory easier.

Here are some Zipinventory Features -

• It can establish variable count frequencies
• View the total amount of menu items that have been sold
• Corrects errors before they become an issue
• Identifies ways to reduce waste
• Keeps your team informed about new recipes
• Allows you to look at inventories anytime

What are the benefits of increasing inventory turnover?

An increase in inventory turnover is directly connected with a rise in profit. Any commodity sold quicker will increase the profits as the cost associated with the inventory decrease.

Below are some points that come into play with a surge in inventory turnover-

Increase in sales-

An increase in inventory turnover means new inventory and anything new attracts customers. This process will in turn increase sales.

Low risk of obsolescence-

Perishable commodities give the best returns when sold quicker than later. The value of most products starts depreciating from the time they hit the store and this can lead to obsolesce. But an increase in inventory turnover can lower this risk with the goods moving out at an expected rate.

Free cash flow-

Most of your cash is in the form of your inventory and an increase in the same would lead to more cash flow. Something that can be used in purchasing new inventory leading to better profit margins.

The inventory turnover formula can clear your companies turnover picture to make things easier for you.

Decreased operating expenses-

A lot of time, manpower, and space goes into storing and selling the inventory. This can be cut down with a fast-moving inventory.

You can keep a tab on your inventory with the help of a inventory turnover ratio calculator.

What determines an effective inventory management process?

There are many things that determine how well a company manages its inventory and what the success of its process is. For example, the type of products they sell, their business model, customer demographics, and warehouse management practices can all have an effect on your inventory management process. Here are some things to consider when designing an effective inventory management system.

Efficient inventory tracking-

You need a reliable system in place to track down inventory from the time it was purchased to its sale with the help of cogs formula.

Division of fresh and old-stock-

Not knowing your inventory well can lead to a lot of chaos. So, it's best to be aware of every item in inventory, from the date of purchase to sale. Also, separating new and old inventory is important for one to analyze trends and clean up the old stock to increase inventory turnover with the help of an inventory turnover ratio formula .

Forecasting-

Certain items sell more than the others, while a few are more in demand around a particular season or festival. Observing and predicting these trends is crucial for a business. An inventory turnover ratio formula
helps forecast with more clarity as it gives you results of the past and can be used in the future.

Is high inventory turnover good or bad?

Do you want to know what a decent inventory turnover ratio is for your business and whether your present balance is excellent or bad? We've discovered the solution!

The number of times a specific item is sold over a given period is measured by inventory turnover, also known as stock turnover. In accounting, it's normally computed once a year, but it can also be done monthly or quarterly.

A good inventory turnover ratio for most industries is between 5 and 10. This means that every 1-2 months, you sell and replenish your inventory. Inventory turnover is low, which could signal a drop in product demand. This also indicates that there may be flaws with the product's marketing.

A low inventory turnover rate means a product or service sells slowly and is likely to be overstocked. A low ratio results in extra costs since products may become obsolete or damaged. A low ratio can also postpone the replacement of outdated goods with newer, more profitable ones.

A larger inventory turnover ratio, in most cases, implies that your business is doing well. However, keep in mind that a ratio that is too high can be harmful.

A high ratio could mean your company isn't buying enough things to stay up with sales. This, in turn, implies you're not earning as much as you could be. High product ratios might also lead to frequent stockouts, pushing your customers or clients to look for alternatives.

What is a good inventory turnover ?

The appropriate inventory turnover ratio is determined by the products you offer and the industry in which you operate. Certain items sell right away. Any product in the FMCG industry, for example, will sell quickly, whereas a hobby item like a stamp will take a long time to sell. Inventory turnover is lower in businesses with better profit margins.

To put it another way, you should check with competitors in your field to see if your inventory turnover ratio is good or bad. The widespread consensus is that if your inventory turnover rate is high, your firm is doing well.