Inventory Turnover: What is it and how does it affect your business?
Posted: Wed Jan 22, 2025 9:18 am
For a business dedicated to the marketing of goods, whether on a large or small scale, one of the most relevant indicators is inventory turnover. This often provides valuable clues about the efficiency of many company processes, such as stock control, purchasing, sales, etc.
If you are involved in retail or wholesale sales and are not familiar with this concept, don't worry, in this article we will tell you what it consists of, its importance and how to calculate it.
What is inventory turnover?
This is a metric that indicates how often a business sells out and replaces its stock during a given period. From this indicator, companies can detect which products sell faster and which take longer to leave the warehouse.
Knowing inventory turnover is essential, as it allows ios database to evaluate the operational efficiency of their businesses, optimize stock replenishment, improve the planning of their purchases and sales, and maintain good financial health. This can be crucial for businesses that sell products with an expiration date, which can quickly lose value and generate significant financial losses.
How to calculate inventory turnover?
inventory turnover what is it
To calculate inventory turnover, it is necessary to divide the cost of goods sold by the average inventory. The latter figure is obtained by adding the value of the initial and final inventory, and dividing it by two. The formula is as follows:
Inventory turnover = cost of goods sold / average inventory
To make things clearer, we want to share with you the case of Laura, an entrepreneur who at the beginning of the year had merchandise valued at 5 million pesos. By the end of the year, the value of her inventory was 3 million pesos. By adding both figures and dividing them by two, we find that her average inventory is 4 million pesos.
According to their records, the total cost of goods sold, that is, the cost of the products sold by Laura during the year, is 12 million.
If we apply the formula (12 divided by 4), we see that the inventory turnover in Laura's business for the period analyzed was 3. This means that, in the year, she sold and replaced her inventory 3 times.
Is this good or bad news? The answer will depend on many factors, such as the type of business or the industry you are in.
If you are involved in retail or wholesale sales and are not familiar with this concept, don't worry, in this article we will tell you what it consists of, its importance and how to calculate it.
What is inventory turnover?
This is a metric that indicates how often a business sells out and replaces its stock during a given period. From this indicator, companies can detect which products sell faster and which take longer to leave the warehouse.
Knowing inventory turnover is essential, as it allows ios database to evaluate the operational efficiency of their businesses, optimize stock replenishment, improve the planning of their purchases and sales, and maintain good financial health. This can be crucial for businesses that sell products with an expiration date, which can quickly lose value and generate significant financial losses.
How to calculate inventory turnover?
inventory turnover what is it
To calculate inventory turnover, it is necessary to divide the cost of goods sold by the average inventory. The latter figure is obtained by adding the value of the initial and final inventory, and dividing it by two. The formula is as follows:
Inventory turnover = cost of goods sold / average inventory
To make things clearer, we want to share with you the case of Laura, an entrepreneur who at the beginning of the year had merchandise valued at 5 million pesos. By the end of the year, the value of her inventory was 3 million pesos. By adding both figures and dividing them by two, we find that her average inventory is 4 million pesos.
According to their records, the total cost of goods sold, that is, the cost of the products sold by Laura during the year, is 12 million.
If we apply the formula (12 divided by 4), we see that the inventory turnover in Laura's business for the period analyzed was 3. This means that, in the year, she sold and replaced her inventory 3 times.
Is this good or bad news? The answer will depend on many factors, such as the type of business or the industry you are in.