The question on most readers’ minds is, what is a good inventory turnover ratio? By definition, an inventory turnover ratio is the rate at which you sell your entire stock. In other words, an inventory turnover quotient is an indicator of how long a company takes to sell its stock.
A Good Inventory Turnover
Well, what is a good number? Well, that depends on the industry. As per the rule of thumb, you are doing well if you have a ratio of more than three and less than five. This includes retail and wholesale businesses.
If your ratio is more than five and less than 10, it is not too bad either. If it is greater than 10, you could have trouble making sales or keeping up with orders.
Wholesale businesses should be looking for an inventory turnover of between 4-10 times per year. Retail businesses should be looking for at least 2-3 times per year as a minimum.
How to Calculate the Inventory Turnover Quotient?
You can calculate an inventory turnover quotient through two ways. One is by dividing the cost of goods sold by the average inventory. An average inventory is the mean of the stock. You have to sum up all the stock in a given period and divide it by the number of months, weeks, or years. Conventionally, the average stock is calculated based on months.
The other technique of calculating the inventory turnover quotient is by dividing the sales value by the closing stock. Out of the two approaches, the first method is preferred to measure the inventory turnover fraction accurately.
Benefits of a Good Inventory Turnover Ratio
Ideally, all companies desire to have a high inventory turnover rate as it indicates that there is a high demand for the goods sold. However, a high inventory turnover rate may also mean that the company has an unreliable purchasing plan.
On the other hand, a low inventory turnover rate shows a low demand but a high supply of the goods you are selling. This is particularly detrimental for companies that sell goods with a short expiry date because the goods will most likely expire before they even hit the market.
So, what are the benefits of having a good inventory turnover fraction?
1. Bulk Purchases
A high inventory turnover rate means that you sell your stock quite fast. More sales increase the purchase bargaining power of your company. Consequently, you can make more bulk purchases which come with the benefits of lower scores, improved credit scores, and a better work relationship with your suppliers.
2. Augmented Sales
Increased sales volume translates to more profit for your company. Also, it means that your clients will have more access to fresh goods as the old stock is quickly exhausted.
3. Boosted Employee Morale
When new stock is sold, employees will be more motivated to work. More sales mean more commission or a better end-of-year package.
Now that you know what a good inventory turnover ratio is and the benefits it offers, you can start working on creating a strategy that optimizes it. You can also use an eCommerce platform like Lightspeed that will simplify and improve your operations.
