![]() ![]() The inventory turnover ratio also provides the necessary information for a business to review how they price its products. It also provides a business with information to make forecasts in the market and how its performance may look in a specific time frame, while also knowing what products consumers want. This can help a company maximise profits, increase its market share or find ideal ways to do so. Related: What Is Logistics Management? (Definition and Importance) Evaluates business performanceīusiness professionals may review the company's performance in the market by using the inventory turnover ratio to find a balance between production and meeting consumer demand. Automation may result in more efficient restocking of inventory, with frequent but smaller orders which help in meeting market demand. They may also consider automating the process of inventory management using software to obtain real-time updates that enable making quicker decisions. This provides a benchmark they can use to further optimise the inventory about market demands and the strategies they use to achieve a higher inventory turnover ratio. They may consider removing such products by stopping production and selling them at a discount to create space for other in-demand products.Ī team may also consider comparing the company's inventory turnover ratios to those of the industry. It also informs a business or production team about the products that aren't selling well. Knowing whether the products are meeting consumer demand results can help the team stock inventory adequately and profitably. It tells them which goods sell well and if they're fulfilling consumer needs, which leads to repeat business. Inventory turnover ratios can help a business team understand the market's demands. Here are the reasons why inventory turnover is important: Manages product demand Why is determining inventory turnover important? A company may consider reviewing its sales and marketing strategy to create demand in a market. A low turnover ratio may suggest low consumer interest or awareness of the product. This enables them to optimise their inventory, preventing both oversupply and undersupply.Ī high turnover ratio shows a high number of products sold, implying high demand, while a low turnover ratio shows low sales and low demand. Professionals in the production or logistic field may use the inventory turnover ratio to make informed decisions regarding the production and pricing of a company's goods. Some organisations may calculate inventory turnover monthly, quarterly or annually. To calculate this ratio, you can use a formula adjusting for the specific time periods. The answer to the question "What is inventory turnover?" is it's a ratio that shows how well a business can sell its inventory and replenish the stock of products for a specific period. ![]() When this is the case for the business you’re analyzing, you’ll likely notice a higher level of accompanying debt, and a lower level of cash-on-hand.View more jobs on Indeed View More What is inventory turnover? This can often result in lost sales, as customers look elsewhere to have their orders filled in a timelier manner. ![]() Sometimes when a company’s inventory ratio is attractively high, for example, it can simply mean that the firm doesn’t have the financial wherewithal to keep its merchandise consistently stocked at a realistic level. This indicates that the overall management of the flow of goods through the business is relatively streamlined, and that the company doesn’t have a lot of stagnant and unavailable funds sitting around in the form of unsold merchandise.īut an elevated turnover ratio is not necessarily a good thing in every situation, and you should always investigate your results in combination with other factors, regardless of the outcome. When the ratio value is high, it means that a company’s inventory is being bought or manufactured, and sold off, quickly and efficiently. So what is a good inventory turnover ratio?Ī higher inventory ratio value is usually viewed as a more positive outcome.
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