Running a business requires up-to-date inventory management. When the demand for your products or services is high, you need an accurate inventory ledger to ensure production is meeting consumer demands. Conversely, when demand is low, business owners need to slow down production to prevent excess stock accumulating, as that risks destabilising inventory. Luckily, a few simple metrics can help you accurately measure your inventory so you can determine your business’ production rates over time. We discuss what inventory turnover ratio is, its importance, and how it can help stabilise your inventory and improve business cash flow.
What is inventory turnover ratio?
Inventory turnover ratio is the number of times the overall inventory of a company has been sold during a specific, accounting period. It determines how well companies manage inventory levels and how frequently they can replenish their inventory.
Through a set formula, you can calculate your stock turn and evaluate your inventory management. The inventory turnover ratio is calculated by dividing the cost of goods sold for a period by the average inventory for that specific period.
The goal of your inventory turnover ratio is to measure financial efficiency as well as curb inventory holding expenses. This allows your business to save money that may have otherwise been spent on leases, labour, utilities, and other inventory management expenses.
The importance of inventory turnover
1. Balances sales and purchases
Sales need to match inventory purchases. When turnover is unstable, businesses falling behind demand or overspending on inventory. A proper evaluation with an inventory turnover calculation can help you achieve sales and purchase balance.
2. Helps determine stock purchase
When a company has a low inventory turnover ratio, it means the business is overproducing stock. On the other hand, a higher inventory ratio indicates good inventory turnover management. Either way, calculating your inventory turnover ratio helps you meticulously calibrate your inventory investments for peak returns.
Limitations of inventory turnover
1. Inaccurate data
Inventory turnover will work when your data is accurate. With misleading data, you could potentially miscalculate inventory management by carrying lower inventories. Effective inventory turnover calculations depend on careful, thorough data collection.
2. Large discounts
When you resort to offering too many discounts and special deals to thin out your inventory and move stock, you risk overcompensating and deflating your inventory cycle.
3. Timing
Timing can also be a potential issue when calculating inventory turnover rates as seasonal items with special promotions can alter ratio outcomes.
Move excess stock with Bartercard!
Overproduction, sparse capacity, and downtime may pose challenges for a company wanting to augment their inventory turnover rate. Management costs such as storage and labour expenses can take up your resources. And when your cash is tied up in inventory, it can influence your company’s cash flow.
Make it a continuous goal to increase your inventory turnover to free up cash. At Bartercard, you can sell your excess or slow-moving stock without the heavy discounting! Utilising B2B Networking, you can barter trade using trade dollar with other active members, improving your cash flow and converting excess stock to additional sales! Make Bartercard work for your business. Join us today!
