And the more sales your business makes, the better your business is said to be performing. Your inventory turnover ratio shows how fast your inventory is being sold. Here are some reasons for calculating your inventory turnover ratio: Analyze business performance Your inventory turnover ratio can give you valuable insights to help optimize your operations, increase efficiency and your overall business performance. Why should you calculate your inventory turnover ratio? ![]() In this case, you want to evaluate revenue generated, customer demand patterns, pricing, and other aspects of your business. ![]() A very high inventory turnover ratio could mean that inventory is inadequate or insufficient which can lead to missed potential sales. However, having an abnormally high inventory turnover ratio may signify the opposite of healthy. For example, an inventory turnover ratio of 10 within a quarter will mean that your inventory was sold and replaced ten times. Typically, this signifies that your sales performance is healthy. So if your inventory turnover ratio is low, it means that the time taken from when your inventory is purchased to when it is sold is longer.įor example, if your inventory turnover ratio is 1, it means that the inventory was sold and replaced once within that period.Ī high inventory turnover rate indicates that inventory is being sold and replaced at a fast pace. If your inventory turnover ratio is a certain number, what does this mean for your business?įirstly, comparing your inventory turnover ratio to other businesses within your industry can provide insights into how effective your inventory management is. How to interpret your inventory turnover ratio ![]() There could also be a low demand for your product in the market leading to overstocking. Low inventory turnover ratio: If your inventory turnover ratio is low, it could mean that your sales are weak.On the other hand, a very high inventory turnover ratio could also indicate a strong demand for your product which requires you to replenish your inventory all too frequently. As an ecommerce business owner, it is important to strive for a high inventory turnover ratio. High inventory turnover ratio: If your inventory turnover ratio is high it could mean that your inventory is being sold effectively.However, the higher your inventory turnover ratio, the better. Once you calculate your inventory turnover ratio, you will need to compare it with other businesses in your industry to find out if it is good or bad. It can vary from one industry to the next, so you want to carry out research first. Well, a “good” inventory turnover ratio depends on what the benchmark in your industry is. ![]() Is it good? Is it bad? What does a low, high, or good turnover look like? Now you’ve calculated your inventory turnover ratio. If your cost of goods sold (COGS) for the previous year is $400,000 and your average inventory was $100,000, your inventory turnover ratio will be 4.
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