Why is inventory turnover important? It steps how hard your inventory investment is working. How hard is the money you have invested working for you? You’ve probably been asked that question several times by stock brokers or “investment counselors.” No, I’m not heading to attempt to sell you shared funds.
This article isn’t about how exactly you are controlling your personal investments. Instead, we will go through the performance of your company’s largest asset: inventory. 10,000 values of a product (at cost) every year. 10,000 of product at one time? 5,000 well worth of the product using the area of the earnings received from selling the first delivery.
Could you make the same gross revenue on an even smaller investment? 2,500 of material. Sell the majority of it. 2,500 value of product. Sell most of that shipment and then repeat the process two more times before the end of the year. Which investment option is better? 7,500 you can use for other purposes, such as stocking other products with potential to create additional revenue.
Every time you sell an amount of a product, products, or other group of items equal to the average amount of money committed to those items, you have “turned” your inventory. The inventory turnover rate measures the real quantity of times you have switched your inventory in the past 12 months.
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- Dr. David Krause, Director, Applied Investment Management Program
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Only consider the cost of goods sold from stock sales loaded from warehouse inventory. Usually do not include non-stock items and immediate shipments. Sure, these sales are essential but don’t involve your warehouse stock (your investment in inventory). The expense of goods sold body in the formulation includes exchanges of stocked products to other branches and levels of these products used for inner purposes such as repairs and assemblies.
Inventory turnover depends upon the common value of stocked inventory. Through the entire month If your inventory levels fluctuate, compute your total inventory value on the first and 15th of every month. Determine the average inventory value by averaging all inventory valuations recorded during the past a year. As you determine your inventory turnover goals, consider the common gross margin you obtain on the sale of products.
Most distributors with 20 percent to 30 % gross margins should make an effort to achieve a standard turnover rate of five to six changes per year. Distributors with lower margins require higher stock turnover. If your company like high gross margins, you can often convert your inventory less. A turnover rate of six turns per year doesn’t mean the stock of every item turns six times.
The stock of popular, fast-moving items should switch more often (up to 12 times per season). Slow moving items may turn only once, or not at all. Finally, calculate inventory turnover separately for each product line in every warehouse. This allows you to identify situations where your inventory does not provide a sufficient return on your investment.
To improve inventory turnover, consider reducing the quantity you get from the supplier. Inventory turns improve when you buy less product, more regularly. You have limited funds available to invest in inventory. You can stock an eternity way to obtain every item. In order to generate the cash necessary to pay your bills and come back a profit, you must sell the material you’ve bought.