That said, an extremely high turnover rate is not always positive. In most cases (read: not always), the higher the inventory turnover rate, the better your business goals are being met. The sweet spot for inventory turnover is between 2 and 4.Ī low inventory turnover may mean either a weak sales team performance or a decline in the popularity of your products. Learn More What is a good inventory turnover ratio for retail? For the most accurate data, use your POS system’s reporting capabilities to automatically crunch the numbers when it comes to stock turn. While it’s important to know the formula behind inventory turnover, make sure you automate the calculation process. Being overstocked potentially points to inefficiencies in marketing, sales, and purchasing or to an economic downturn on a local, regional, or national level. Their inventory turnover is 0.29, indicating that they are spending too much money on holding costs (storage costs), and items are lingering on the shelves. Luxe & Company sold $100,000 in goods this year and had an average inventory of $350,000. This number shows that products are selling at a profitable rate. Their inventory turnover is 2, meaning they had to replenish their full inventory twice over the past year. $500,000 in sales divided by $250,000 worth of inventory = 2 High Five Streetwear sold $500,000 in products this year and had an average inventory of $250,000. The formula for calculating inventory turnover ratio is:Ĭost of Goods Sold (COGS) divided by the Average Inventory for the year Inventory turnover formula: How do you calculate stock turn? Throughout the year, there will be peaks and valleys of inventory due to holidays, back-to-school, and seasonal apparel shopping that will skew your numbers. When you compile the average inventory for a year, you get a clearer picture of the financial standing of your business. In accounting practices, it is usually calculated for the year but could also be done on a monthly or quarterly basis. What is inventory turnover?Īlso referred to as “stock turn,” “inventory turn,” or “stock turnover,” inventory turnover is a measurement of the number of times inventory is sold in one year. One of the key metrics that can help you figure all that out is inventory turnover, which as you’ll learn below, plays a critical in planning and managing your stock. Too much inventory leads to high holding costs, while too little stock means possibly missing out on sales.įor the most part, inventory management is all about finding that balance and ensuring that you have the right products at the right time. There is a delicate balance between having too much or too little stock on hand. As a retailer, you’re always looking for ways to increase sales and profits, as well as manage the space you have for inventory.
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