Calculate Inventory Turnover Rate

Inventory Turnover: Learn 3 Key Steps to Turnover Formula

Inventory turnover a ratio to measures the number of sales or consumption of inventory over a given time period.

Literally, knowing the WooCommerce inventory management turnover is the optimal manner to come out with huge sales from the stock you hold.

Well, inventory turnover is also called as – turns, stock turns, and sometimes the stock turnover.

To that of, it is calculated by dividing the COGS (cost of goods sold) by the average of total inventories.

Calculate Inventory Turnover Rate

The inventory formula is a simple formula to calculate the ratio.

Let’s elaborate on it…

  • From your annual income statement, determine the total COGS (cost of goods sold).
  • Compute the average inventory cost, adding the beginning inventory together and ending the inventory balance for a month, and dividing by two.
  • At last, divide the COGS (cost of goods sold ) by the total average inventory.

Still getting difficult to calculate, let’s understand with an easy digram…

Remark: In this inventory turnover calculator, average inventories are used instead of ending inventory because goods fluctuate throughout the year.

Well, it is very important to know the inventory turnover ratio as it depends on the two fundamental components, mentioned as follows:

The first is a stock purchase. If a large amount of inventory is purchased during the year, your company will have to sell more and more inventory to improve its turnover. If you cannot, this will entail storage costs and other holding costs.

The second component is the sales. Sales must match inventory purchases otherwise the inventory will not be effectively operational. That is why the buying and selling departments should stick to each other.

How Turnover Helps to Measure Performance

As we all know that IT (Inventory Turnover) formula can be used to compute the efficiency. Hence, computing the higher turnover indicated better performance measuring and lower inefficiency.

The reason for this is that a higher turn shows that you are not looked after by purchasing too much and wasted resources at storage costs. It also shows that you are effectively selling the inventory you have purchased and are quickly filling up with cash.

Alternatively, a low inventory turnover rate may be due to overstocking or inefficiencies in the product line or sales and marketing effort. This is generally a bad sign because products tend to go bad because they are sitting in a warehouse while keeping costs down. In addition, excess inventory binds a company’s cash and makes you vulnerable to falling market prices.

But there are nuances and exceptions to those general principles. Exceptionally high turnover rates can indicate strong sales or ineffective purchases, ultimately leading to losses in the business because the inventory is too low. This can result in a shortage of stock and ultimately reduced sales.

How Inventory Turnover Helps in Increasing Profitability

Generally, an item whose inventory is sold once a year has a holding cost that changes more often.

Increasing inventory turnover increases profitability for three reasons:

  • Rapidly decreasing holding costs are reduced: eg, rent, utilities, insurance, theft, and other costs of maintaining stock sold.
  • The decreasing cost leads to an increase in net income and profitability as long as the revenue derived from selling the commodity remains constant.
  • Inventory that changes quickly also increases your accountability to customer demands; This is a major concern in fashion and technology.

Techniques to Optimize Inventory Turnover Ratio

There are several strategies that a business can adopt to improve its inventory turnover ratio:

  • Increase inventory demand through a targeted, well-designed and cost-appropriate marketing campaign.
  • Review the pricing strategy of businesses and analyze what the overall increase in selling price will be.
  • Regularly review purchase prices with suppliers and ask for discounts when bidding or placing an order.
  • Define inventory groups in ways that will be useful to your business, so you are better placed to understand, understand and react to inventory that should theoretically behave in a similar way.
  • Gain a deeper understanding of your best selling products and stock listings.
  • Improvement in forecast accuracy by inventory and monitoring trends.
  • Encourage products to pre-order, enabling your business to plan inventory purchases.
  • Review and eliminate static inventories to prevent them from occupying valuable warehouse space.

Afterward to Inventory Turnover

The company’s inventory turnover varies greatly by industry. Fashion retailers average between 4 and 6. Motor vehicle parts can be over 40. Grocery stores are around 14. To last, car marketers are between 2 to 3.

So, the conclusions somewhat say that the low-margin firms or marketers have a turnover of higher ration than that of the high-margin turnover marketers and businesses.

Going forth, if you agree to these points then here is the key which will let you open the lock of turnover i.e, WooCommerce inventory management plugin!

Furthermore, it is important to understand that the timing of inventory purchases – especially those designed for special promotions or new product introductions – can suddenly and somewhat artificially change the ratio.

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