What is inventory turnover?
Inventory turnover is a ratio that shows how many times a company's inventory is sold or used in a period. It is also known as inventory turns. The higher the number, the better, because it means that the company is selling or using its inventory more quickly. A low number might indicate that the company is holding too much inventory, which ties up cash that could be used for other purposes.
How is inventory turnover calculated?
Inventory turnover is calculated by dividing the cost of goods sold (COGS) by the average inventory. COGS can be found on a company's income statement, and average inventory can be found by adding the beginning inventory to the ending inventory and dividing by two. Here's the formula:
Inventory turnover = COGS / Average inventory
What are the benefits of a high inventory turnover?
A high inventory turnover is generally seen as a good thing, because it means that the company is selling or using its inventory quickly. This is important because it means that the company has less money tied up in inventory, which can be used for other purposes, such as investing in new products or expanding the business.
What are the consequences of a low inventory turnover?
A low inventory turnover can be a sign that the company is holding too much inventory, which can tie up a lot of cash that could be used for other purposes. Additionally, it can be a sign that the company is not selling its products quickly enough, which could lead to the products becoming outdated or obsolete.
How can inventory turnover be improved?
There are a few ways that companies can try to improve their inventory turnover. One way is to reduce the amount of inventory that they keep on hand. This can be done by reducing the lead time, which is the amount of time between when an order is placed and when it is received. Another way to improve inventory turnover is to increase sales. This can be done by offering promotions or discounts, or by increasing marketing efforts.
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