It means you are ordering regularly and moving stock through the business quickly, rather than purchasing a huge pile of stock that takes up space and shrinks down slowly. The general idea is that a higher inventory turnover ratio is better. To achieve an inventory turnover ratio of more than one, you will need to have bought more stock during the year, probably on multiple occasions. Of course, you can’t sell the same stock more than once. You might also hear people say that they “turned over” their inventory twice or that they had two “inventory turns”.
If you sold 200 units in the year, and had 100 units in stock on average, your inventory turnover ratio was 2. The ratio is calculated from the cost of inventory, but let’s look at an example based on units to make it simpler.
Your inventory turnover ratio shows how many times inventory was repeatedly sold and replaced over a period of time, usually a year. Without them, you are working in the dark and risk making decisions that move your business in the wrong direction. This helps avoid stock-outs and excess inventory, shows the impact of higher costs, and helps you prioritize the most profitable products.Īs you make changes to how you manage your purchasing, product selection, pricing and marketing, these metrics will change, showing you clearly if things are improving or declining. Once you know them, you have a baseline that you can monitor. These metrics provide an overall picture of your inventory health. Inventory turnover ratio and inventory-to-sales ratio are usually annual metrics, and inventory sell-through rate is typically calculated on a monthly basis. This tells you how quickly you are selling your stock.
#Inventory turnover rate calculator how to
Here’s how they work, and how to use them in your business. The way you can do that is by using three simple inventory metrics: inventory turnover ratio, inventory-to-sales ratio, and inventory sell-through rate. You should always want to sell products faster, with the lowest possible inventory on hand, and the lowest possible capital invested in that inventory. It’s a simplistic example, but it illustrates a point. Just by improving the rate at which you move your inventory, you have $15 in profits rather than $8. Now, if you can shorten your cycle times and squeeze four cycles into a year, you will come out with $16 instead.
#Inventory turnover rate calculator plus
That’s made up of the original $1 you invested, plus $7 in profit. If you can do this three times in a year (typical for an Amazon private label seller), you will fit in one more cycle and end the year with $8. Repeat that cycle, and reinvest your $2 in more inventory, to generate sales of $4. You sell that inventory and make a profit of $1, so now you have $2. Let’s say you start the year with $1 of capital that you take and invest in inventory.
The more times you run this machine, the more profit you generate. Retail is a money machine where you turn capital into inventory, and inventory into sales. This post is by Fabricio Miranda of Flieber.
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