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Inventory Turnover Ratio (All You Need to Know)

Inventory Turnover Ratio

From now on, you will have the necessary knowledge about everything related to the inventory turnover rate. Without leaving home, by reading this guide, you can clarify your doubts about this topic. Also, you will know how experts calculate the inventory turnover index and what its entire process consists of.

When speaking of the inventory turnover rate, we refer to one of the most widely used indicators in a company. A company uses this indicator model to be able to carry out complete control of logistics. This indicator is one of the most important in a company.

During one year, owners renewed multiple times items or commodities from their company. This indicator is responsible for keeping track of this rotation. Companies owners manage their supply in this way, but differences are depending on the size of the sector to which reference will be made.

For example:

  • Supermarkets: Inventory turnover index (Value of 25)
  • Large surfaces: Inventory turnover index (Value of 8)
  • Industries: Inventory turnover index (Value from 4 to 5)

This calculation is an average index that depends on the size of each sector. It can also vary depending on the number of articles or the raw material that is used. People use a formula to interpret the inventory turnover index more accurately.

This formula explains that the higher the index, the faster the inventory renewal will be. This will be due to the growth of sales and the efficient management of the items that are in stock.

Inventory turnover index formula

The inventory turnover index has a mathematical formula to give an exact calculation. People take two variables to perform this calculation:

  1. The price paid to the supplier for the products.
  2. The existence of products that are in the warehouse.

This calculation is carried out annually, although there are companies that do this calculation every month, or daily. In this way the formula is carried out:

IR: Cost price x the items sold / average value of the stock of the products

Companies usually keep track of this data, so when they have to use the inventory turnover index indicator, everything will be more comfortable. For a higher organization, companies, industries, and supermarkets keep this record in Excel. You can follow the record from a computer and is an easy program to use.

In a company, the inventory turnover rate can have changed, since it can be high or low:

High inventory turnover rate

When the inventory turnover rate is high, it is due to the flow of the inputs and outputs of the products that are in the warehouse. This will be a good indicator to know how efficient the performance of the company is and how significant is the increase in its sales.

Low inventory turnover rate

It is a bit difficult to maintain high inventory turnover for all products in an inventory. For this reason, in a company, there will always be a wide variety of products, and some will have a low inventory turnover rate. They are equally crucial for the profitability of the company, and therefore they will always be indispensable.

Example: Supermarkets, because they sell different products, and among them will always be those with a low or high inventory turnover rate.

How does the inventory turnover ratio influence companies?

The turnover rate is very important for companies to know how many times the inventory must be replenished. As the inventory index is higher, the benefit of the company will be greater. The reason is that the index is high assumes that the inputs and outputs of existing products are constant.

When this indicator shows high figures, it means that the company had a large number of sales of its merchandise. To adjust the storage costs in the company, this indicator will also be very useful. The turnover rate will be the one that will let the company know how the efficiency of its sales is going.

Having lower-than-expected sales, the company will consider implementing some logistics strategies so that the turnover rate remains as high as possible. Seeing that a warehouse is emptying quickly, this means that the turnover rate will increase because sales have been a success.

Each company, regardless of the sector it is dedicated to, must use the turnover index to observe how its inventory is doing. If a company does not use this turnover rate, they will not know how their sales are going. In this way, the competition at any time can exceed them.

This indicator will indicate how often the warehouse must be supplied. From this result, the conclusion of the state and effectiveness of the company will be drawn.

Inventory turnover index makes the difference

Without the inventory turnover rate, a company cannot live because it would have no idea of ​​the management of its sales. This indicator will also help the company to know the amount of capital to invest. The higher the inventory turnover rate, the fewer capital owners must invest in storage costs.

For a company not to have losses, there must be a constant input and output of the products that are in the warehouse. In this way, the losses that can sometimes be a consequence of the products that expire in the store for long periods of storage will be avoided.

Regarding the investment in storage costs, they may vary according to the company:

  • A product that has a large number of sales needs more attention, and the cost of storage can increase.
  • When a product is the most sold, it requires more interest, and the company must have sufficient quantity so that there is always availability.
  • Each company, according to its needs, must implement different logistics to plan the storage of the products with the highest sales.

Due to all these characteristics, people should use the inventory turnover index by companies to learn more about the products they have for sale, and what strategies they should implement in each one, depending on their demand.

On the web, there are many programs and software that can also be of great help so that companies can keep track of the cost value of each product. But it depends on each business and its needs, its mechanisms to use to carry out a better organization.

As you can see, many rations suggest the inventory turnover index, as the most indispensable indicator for companies.

Efficiency in a company

For a company to function correctly, it has to have control of its entire system. The indicators will always be of great importance for a better organization, especially the turnover rate since it allows obtaining the most suitable maintenance for the inventory.

The inventory is the result of the total of the products that owners store in a company to be sold. By making an inventory, you will also be able to know the number of products that could be sold in a given time.

If you have a business and want it to be on track, it will be essential that you use the turnover index indicator. If the inventory is poorly controlled, the company may have problems that may be due to some variables:

Products with low inventory turnover

Those products that remain in storage for a long time because they have little output.

High turnover products

If there are high sales of a product and there is not enough storage so that it is always available, there will be an imbalance.

Advantages of inventory turnover

A company, which includes inventory turnover among its indicators, will be able to enjoy some advantages:

  • Those companies that are dedicated to the sale of perishable and fashionable products need a rapid inventory turnover.
  • This indicator will let you know which are the most important products for the rotation, and thus the company will obtain more sales.
  • The expenses to carry out the inventory are reduced.
  • The indicator will allow a better administration to the company when buying the products that it is going to offer to the supplier.
  • It is the best way to know if sales in a company are successful or not.
  • A company can attract many customers if it always has the availability of the products that have the most output.
  • By keeping an inventory rotation control, a company can know the number of products that are available on the shelves.

A company or a business that uses the inventory turnover index may obtain better results in its operation. It is not only to keep a superficial control, but it is also important to use the corresponding indicators so that the products can be organized and the most pertinent strategies and decisions are made.

For example, a supermarket that maintains the correct inventory will have each product on the corresponding shelf. In this way, it will make the customer obtain a very efficient purchase.

It is also important to note that there are products that are sold more at one time than another. As is the case with coats, which have more demands at certain times of the year, and so it is with many more products. With a good inventory, a company can know which is the product that can have more output in a given time.

It is important to apply inventory rotation correctly

A company must be aware of reviewing the statistics of the economic sector in which it operates. In this way, you will know how to exercise your inventory rotation to face other competitors and businesses similar to your sector. The inventory turnover rate is the only indicator that will make this accurate information known.

One of the most recommended tips is to use the same currency for calculations. In this way, people can obtain a more successful result and better organization.

The main objective of a company is to sell its products as soon as possible. For this reason, inventory turnover will help the company to know which are the products that may have a greater output and thus be able to catch up with its other competitors.

First, the company needs to identify the type of product it has for sale. For example, a business that has luxury cars for sale may not have a high inventory turnover.

By using the inventory turnover index, the company can take advantage of comparing its turnover with other companies that belong to the same sector. If you have a company but do not have much knowledge about this indicator, you do not have to worry. On the web, many programs will make this process easier.

By using the inventory turnover index if you have a company, you will be able to know:

  • Have control of storage costs.
  • Calculate inventory turnover to apply the corresponding logistics.
  • How to excel in the sector of your company, offering products that may have a high inventory turnover.

Conclusion

Many companies use the inventory turnover index to manage their products and sales better. In short, it is an indicator that cannot be missing in any business, regardless of the sector in which the owner is dedicated.

The formula for this indicator is not so complex, and people can use it to make calculations for a certain period. It is already in each company, uses this annual, monthly, or daily index.

The companies that use this indicator have managed to have a great evolution. Competitive advantages will always be of great help to companies. That is why it is so important to renew the offer constantly. Most companies rotate inventory every two weeks to always have product availability.

But only the inventory turnover ratio will let the company know how it should handle this process. Every time it should take to keep the products that have the most output available. Although the company is physical or manages its sales online, this indicator will still be essential.

A company with high inspirations in its sector should use this index. It is the only indicator that can lead to the path of success.

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