Holicent
VIP Contributor
Inventory turnover is a financial ratio that shows how many times a business's inventory is sold and replaced during the year. It can be calculated for an individual item or for the entire inventory.
Inventory turnover is expressed as a ratio, with the numerator being sales and the denominator being cost of goods sold (COGS). For example, if a company sells $1 million worth of merchandise at an average cost of $50 per unit, it has sold 50,000 units. If its COGS total is $800,000 and its inventory turnover is 4, then it turns over its entire inventory about every four months. The higher the number, the faster you're selling your inventory out and replenishing it with new stock.
There are two main reasons why businesses monitor their inventory turnover:
To see if they have enough merchandise available to satisfy customer demand. If your inventory turnover is low compared to other companies in your industry, you may need to increase your inventory levels or buy more quickly from suppliers to keep up with demand. You also may want to consider reducing prices temporarily if you're having trouble keeping up with demand without increasing overhead costs.
Inventory turnover is expressed as a ratio, with the numerator being sales and the denominator being cost of goods sold (COGS). For example, if a company sells $1 million worth of merchandise at an average cost of $50 per unit, it has sold 50,000 units. If its COGS total is $800,000 and its inventory turnover is 4, then it turns over its entire inventory about every four months. The higher the number, the faster you're selling your inventory out and replenishing it with new stock.
There are two main reasons why businesses monitor their inventory turnover:
To see if they have enough merchandise available to satisfy customer demand. If your inventory turnover is low compared to other companies in your industry, you may need to increase your inventory levels or buy more quickly from suppliers to keep up with demand. You also may want to consider reducing prices temporarily if you're having trouble keeping up with demand without increasing overhead costs.
