Inventory Turnover Ratio: What It Is, How It Works, and Formula

That means you’re efficiently moving your products without having them sit on shelves for too long. A grocery store will have a higher inventory turnover rate than a business selling specialty packaged (non-perishable) gourmet foods, for example. It should be part of your overall effort to track performance and identify areas for improvement. The Inventory Turnover Ratio, or ITR (a.k.a. stock turnover ratio) measures the number of times a business sells and replaces its inventory over a certain period. Never forget that it is vital to compare companies in the same industry category.

Use this tool to calculate how fast you’re selling your inventory to ensure you’re not overstocking. Then you’ll calculate the ITR by dividing the cost of goods sold by the average inventory value. This worsening is quite crucial in cyclical companies such as automakers or commodity-based businesses like Steelmakers.

How do I increase my inventory turnover rate?

Features like these help businesses boost efficiency and save money, which will be reflected in future inventory turnover ratios. The analysis of a company’s inventory turnover ratio to its industry benchmark, derived from its peer group of comparable companies can provide insights into its efficiency at inventory management. For 2021, the company’s inventory turnover ratio comes out to 2.0x, which indicates that the company has sold off its entire average inventory approximately 2.0 times across the period. The inventory turnover rate takes the inventory turnover ratio and divides that number into the number of days in the period. This calculation tells you how many days it takes to sell the inventory on hand.

Understanding how this ratio works can be a stepping stone to optimizing both. In general, high inventory turnover is good unless your products are turning over so fast that you can’t keep up. You want to make sure you have inventory levels high enough so that you can fulfill all your orders.

Cash Flow Loans

Borrowers can use this information to help determine how much inventory financing they need, and for how long. While a high ratio generally implies efficiency, excessively high ratios may indicate insufficient inventory levels, potentially leading to missed sales opportunities which of the following factors are used in calculating a companys inventory turnover? or customer dissatisfaction. A low turnover implies that a company’s sales are poor, it is carrying too much inventory, or experiencing poor inventory management. Unsold inventory can face significant risks from fluctuating market prices and obsolescence.

This financial ratio allows a company to calculate how long it may take, on average, to sell its inventory. One of the best strategies for strengthening your bottom line and boosting efficiency within your business is to take a closer look at inventory management data. As a whole, metrics like efficiency ratios can help businesses to assess their own performance in using assets effectively. This important metric can help businesses to better understand and, if needed, shift their approach to inventory management. The inventory turnover ratio is an important metric for businesses, especially those in the retail and manufacturing industries.