Inventory Turnover is a measure of the efficiency with which a business sells its inventory. It is calculated by dividing the cost of goods sold (COGS) by the average inventory for a period of time, such as a year. For example, if a business has COGS of $100,000 and an average inventory of $50,000, its Inventory Turnover is 2.
Inventory Turnover is important because it indicates how well a business is managing its inventory. A high Inventory Turnover means that the business is effectively selling its inventory and generating revenue from it. On the other hand, a low Inventory Turnover may indicate that the business is carrying too much inventory, which can tie up capital and lead to higher carrying costs.
There are several ways to improve Inventory Turnover, including:
• Accurately forecasting demand for the business's products or services in order to maintain the right level of inventory
• Implementing just-in-time (JIT) inventory management techniques to minimize the amount of inventory on hand
• Regularly reviewing and evaluating the inventory to identify slow-moving or obsolete items and take action to dispose of them
• Negotiating with suppliers to get the best prices for the inventory and reduce carrying costs
• Implementing an inventory tracking and management system to improve visibility and control over the inventory
The average Inventory Turnover for a business can vary widely depending on the industry and other factors, such as the size of the business and the type of products or services it sells. It is important for a business to benchmark its Inventory Turnover against other businesses in its industry in order to determine if its turnover is in line with industry norms. This can help the business identify opportunities to improve its Inventory Turnover and increase its efficiency in managing its inventory.