Questions to ask yourself about your inventory turnover

Questions to Ask Yourself
About Your Inventory
Turnover

Contact Us: M: +91 9611 171 345
Questions to Ask Yourself About Your Inventory
Turnover
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www.salesbabu.com Email: sales@salesbabu.com
Every business has inventory and its cash flow as its lifeline for earning revenue in the
longer run. There are different methods and statistics which can be implemented to a
balanced inventory cash inflow and productive sales for the business. Inventory
turnover methodology is one of them.
Let’s understand how this inventory turnover formula will help in increasing our sales
and having a balanced inventory in our warehouses.

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What is Inventory Turnover?
Inventory turnover is the ratio, to give an insight into the eﬃciency a company has, both
absolute and relative while converting it’s cash into sales and business revenue. In other
words, it is a ratio depicting how many times an organization has sold and replaced
inventory during a given period of time. Companies can then divide the no. of days in a
given period by the inventory turnover formula to calculate the days it would take to sell
inventory in hand.
Calculating inventory turnover helps businesses in making better choices and do futuristic
inventory planning on pricing, manufacturing, marketing and purchasing of new stock in
demand.

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How is Inventory Turnover calculated?
Inventory Turnover = Annual Sales / Average inventory for a period.
Where: Average Inventory=(BI−Ending Inventory)÷2
BI=Beginning Inventory
Point to note here is that some of the companies use cost of goods sold, instead of annual
sales while calculating the inventory tracker value. When using the inventory turn ratio to
compare companies within an industry, we need to make sure we are using ratios
calculated on the same basis. If you assess one company using the cost of sales in the
calculation, and the other using total sales, you'll have an inconsistent and faulty
comparison . These improper value of inventory turnover ratio will be of no use for your
business management.

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Questions on Inventory Turnover
Why do you need to measure inventory turnover?
You’ll make smarter business decisions
Understanding your market trends and closely monitoring stock turn helps in making
better purchasing decisions, keep a constant merchandise movement in our warehouses
and sell smarter to your customers with a complete view of market trends in hand.
This Inventory metrics can inform you of many decisions like:
● What items need to be ordered – Understanding your product market trends can be
repeated using these turnover values and help us to decide on which products need
a refill and which product is going obsolete in our warehouses.
● What units need to be kept in front of the sale aisle – Dead stock and out of date
products can be reshuffled and sold first to avoid any product wastage.
● What has to be ordered in advance to allow ample time for
manufacturing/production/shipping – understanding the amount of raw material
required in the products production cycle, we can ensure that we don't run into out of
stock or stock-out situations and preorder our required amount of spare parts in
advance.
Clearly, when we have a solid handle on inventory turnover, we have better answers to our
daily inventory needs which are useful for making futuristic and more efficient stock
requirement decisions.

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continues...
What's a normal Inventory Turnover Ratio?
Inventory turnover ratio varies from one industry to the other. Comparing the inventory
turnover rate for our company against our competitors will give us an insight into their
inventory management team and help us to generate more sales with our learning curves.
In general scenarios, retail grocery stores and food chains typically have a much higher
inventory turn rate as these low cost products are perishable in nature and require more
diligent management team.
Heavy machinery and hardware companies have lower turnover ratio due to the high rate
of products and longer duration of production and sales cycle.

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continues...
How to improve Inventory Turnover ratio?
➢ Better Forecasting
Forecasting is very important in understanding your inventory trends. If we can understand
and forecast our customers demand trends correctly, we can only order the required set of
inventory. With the high demand for required stocks in hand, we can definitely improve our
business revenue.
➢ Improve Sales
Improved marketing strategies help in improving overall inventory ratio. With better sales of
in-demand products with advertisements, promotional events and offers,the inventory ratio
will definitely improve. This in-turn helps in increasing overall revenue for the organization.
➢ Reduced Product price
Many companies apply the option of reduced prices to an attractive level to increase their
product sales. Items with a lower sales rate and with marketing team not able to increase
its demand, providing discounted price strategy helps in increasing the sales of the
products and overall working capital for the company. In such low profit margin cases, out
and outdated inventory stocks can be quickly removed to improve the overall turnover ratio
of the products.
➢ Focus on Top Selling products
Applying the Pareto's 80:20 principle, we should invest more on the products that get you
the maximum profit and at the same time eliminate or reduce the purchases of products
which have low sales rate and are incurring losses for your firm. Removing the lower
turnover ratio for products in loss, will improve the overall inventory turnover for the
company as a whole.

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Disadvantages of Inventory Turnover
Ratio
Let’s understand some of the disadvantages of inventory turnover ratio.
➔ Lost Sales
Moving your inventory to a high inventory ratio can have its own negative effects.
Merchants man elect to limit the variety and amount of the products they carry to prevent a
backlog of inventory and keep goods moving in their warehouses. While merchants are
more focused on improving the inventory ratio, products in hand can quickly go out of
stock and many customers may find it difficult to get the required quantity. In such
scenarios many clients drifts towards many competitive products, to keep their required
quantity fulfilled and may never turn back to the current product at all.
➔ High Expenses
Many merchants order small quantities of inventory to keep their inventory levels high and
incur the greater cost for the business. Transportation expenses come to a higher value for
repetitive and small orders. Also, merchants who order small quantities often ,miss out on
the bulk discounts and special deals on high volume purchases. In some cases, merchants
may have to order expensive express delivery methods to prevent out-of-stock situations.
Along with these, many taxes and other processing charges get additionally added to
multiple and frequently repetitive orders.

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Conclusion
Inventory turnover ratio helps in knowing which products to store or
reorder and how much to order. These information are the key
game-changing insights for any business model. Having a solid
knowledge on your inventory turn, allows you to stay on top of your
game in making right decisions for carrying the correct amount of
inventory at the correct time. SalesBabuCRM is an eﬃcient cloud
based inventory management tool to help you with analyzing your
product requirements and manage your inventory.

Contact Us: M: +91 9611 171 345
Thank you for Visiting Us
Our Address
SalesBabu Business Solutions Pvt. Ltd.
No.38/11, 3rd Cross, G Block, Sahakarnagar, Bangalore – 560092
Tel: +91 9611 171 345 ,
Mobile: +91 9341 323 571
E-mail: sales@salesbabu.com
Website: www.salesbabu.com

Questions to ask yourself about your inventory turnover

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Questions to ask yourself about your inventory turnover