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What is Inventory Turnover?

The term inventory turnover goes by a number of names like inventory turns, stock turns, stock turnover, depending on which part of the world you live in. But the basic premise of the concept remains the same: to find out how many times the inventory ‘turns over’ within a specified period. The specified period is a year. Turning over means how many times the inventory comes into the warehouse of the business and leaves it for the process of production. The inventory turnover ratio is calculated with the inventory turnover formula in days which supplies the details regarding the stock turnover.

If the inventory turnover ratio is high, which means that your inventory policy involves buying more times over a period and consuming, there are a chain of events associated. Purchasing inventory involves two other costs other than the cost of purchase itself: the cost of holding the inventory (warehousing) and the cost of delivery. So if you buy less inventory, more times a year, then you incur a higher delivery cost for the period, because you have to go fetch the stuff a lot more times. At the same time, you need not have a pretty big warehouse and hence that cost is lower. Thirdly, having a low inventory means reduced risk of spoilage and wastage and that lesser company money is locked up in the inventory.

The formula for Inventory Turnover

Inventory Turnover = Total Cost of Goods Sold / Average Inventory

The formula for Average Inventory

Average Inventory = ( Inventory “beginning” + Inventory “ending” ) / 2

The formula for Average Days to Sell

Average Days to Sell = 365 days / Inventory Turnover Ratio

Purchasing more inventory means reduced aggregate delivery cost since the shipment perhaps comes only once or twice a year. Warehousing costs will be higher because there is a lot more stuff to store and hence needs a lot more space. And while there are chances of losses due to spoilage and the money is locked up in the inventory, this can be compensated for by the benefits of economies of scale.

So the desired level of inventory turnover really depends on the company policies. If the business uses a bulk of foreign made raw materials in its production, it makes little sense to order a tiny shipment every week or month. Then again, if the raw materials are like to be spoiled, then there is no option trying to store them for a longer time. The DSO and other ratios are key to understanding financial statements. Our relationship spreadsheets reduce time and effort in the calculation of coefficients of the decision-making. Reduce the risk to lenders and investors and enable owners, managers and consultants to increase productivity and corporate profits. These spread-sheets are low prices that provide a huge return on investment. Burt and Associates, the debt collection agency, can help you keep your inventory under control.

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