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Inventory turnover ratio formula how to#

Inventory turnover is the rate that inventory stock is sold, or used, and replaced.

Inventory includes all goods, raw or finished, that a company has in stock with the intent to sell.

For example, consumer packaged goods (CPG) usually have high turnover, while very high-end luxury goods, such as luxury handbags, typically see few units sold per year and long production times.Ī number of inventory management challenges can affect turnover they include changing customer demand, poor supply chain planning and overstocking.

Successful companies usually have several inventory turnovers per year, but it varies by industry and product category. One complete turnover of inventory means the company sold the stock that it purchased, less any items lost to damage or shrinkage. Inventory turnover refers to the amount of time that passes from the day an item is purchased by a company until it is sold.

Inventory turnover ratio formula how to#

Conversely, a low ratio indicates weak sales, lackluster market demand or an inventory glut.Įither way, knowing where the sales winds blow will inform how to set your company’s sails. A high ratio implies strong sales or insufficient inventory to support sales at that rate. Turnover ratio also reveals a lot about a company’s forecasting, inventory management and sales and marketing expertise. That inventory turnover calculation informs everything from pricing strategy and supplier relationships to promotions and the product lifecycle. Generally, however, items drift along somewhere in the middle, meaning all companies need a handle on what’s moving and how quickly. Other times, you can’t discount deeply enough.

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