What is Inventory Turnover?
Inventory turnover is a measure of how quickly a company can sell or use up its inventory of goods over a given period of time. It is an important measure of a company’s efficiency in managing its inventory, as it can show how quickly the company is able to get the goods it needs to meet customer demand.
Importance of Inventory Turnover
Inventory turnover is an important measure for companies because it indicates how efficiently the company is managing its resources and how quickly it is able to produce and sell its products. A high inventory turnover rate indicates that the company is able to quickly get the goods it needs and is able to meet customer demand. A low inventory turnover rate, on the other hand, indicates that the company is not able to quickly get the goods it needs and is unable to meet customer demand, which could potentially lead to lost sales.
How to Calculate Inventory Turnover
Inventory turnover is calculated by dividing the cost of goods sold (COGS) by the average inventory during the period. Inventory Turnover = COGS / Average Inventory
Examples of Inventory Turnover
- A company with $100,000 in COGS and an average inventory of $20,000 would have an inventory turnover ratio of 5.
- A company with $200,000 in COGS and an average inventory of $50,000 would have an inventory turnover ratio of 4.
- A company with $400,000 in COGS and an average inventory of $100,000 would have an inventory turnover ratio of 4.
Conclusion
Inventory turnover is an important measure of a company’s efficiency in managing its inventory. A high inventory turnover rate indicates that the company is able to quickly get the goods it needs and is able to meet customer demand. A low inventory turnover rate, on the other hand, indicates that the company is not able to quickly get the goods it needs and is unable to meet customer demand, which could potentially lead to lost sales. For more information on inventory turnover and other inventory management metrics, please visit: https://www.investopedia.com/terms/i/inventoryturnover.asp https://www.business.com/articles/inventory-turnover/