Why does inventory turnover change

Retailers that move inventory out faster tend to outperform. The longer an item is held, the higher its holding cost will be, and the fewer reasons consumers will have to return to the shop for new items.

A good example can be seen in the fast fashion business. Slow-selling items equate to higher holding costs compared to the faster-selling inventory. There is also the opportunity cost of low inventory turnover; an item that takes a long time to sell prevents the placement of newer items that may sell more readily.

Inventory turnover is an especially important piece of data for maximizing efficiency in the sale of perishable and other time-sensitive goods. Some examples could be milk, eggs, produce, fast fashion, automobiles, and periodicals. An overabundance of cashmere sweaters may lead to unsold inventory and lost profits, especially as seasons change and retailers restock with new, seasonal inventory.

Such unsold stock is known as obsolete inventory or dead stock. Some retailers may employ an open-to-buy system as they seek to manage their inventories and the replenishment of their inventories more efficiently. Open-to-buy systems, at their core, are software budgeting systems for purchasing merchandise. Such a system can be used to monitor merchandise and may be integrated into a retailer's financing and inventory control processes. It can help small retailers better manage decisions on how much inventory to buy, how to evaluate how inventory is performing, and assist with future inventory procurement.

Such software may be tailored to some degree but may not be useful for all types of merchandise. For example, it may work best with seasonal merchandise and fashion, but may not be a good fit for fast-selling consumer goods or basic items and staples.

In other words, within a year Company ABC tends to turn over its inventory 40 times. Taking it a step further, dividing days by the inventory turnover shows how many days on average it takes a company to sell its inventory. Inventory is on hand for Inventory turnover shows how quickly a company can sell turn over its inventory.

Meanwhile, days of inventory DSI looks at the average time a company can turn its inventory into sales. Basically, DSI is the number of days it takes to turn inventory into sales, while inventory turnover determines how many times in a year inventory is sold or used. When comparing or projecting inventory turnover, one must compare similar products and businesses. For example, automobile turnover at a car dealer may turn over far slower than fast-moving consumer goods FMCG sold by a supermarket snacks, sweets, soft drinks, etc.

Trying to manipulate inventory turnover with discounts or closeouts is another consideration, as it can significantly cut into return on investment ROI and profitability.

Inventory turnover is a measure of how quickly a company sells its inventory in a year and is often used as a metric of overall operational efficiency. There are two popular ways of calculating inventory turnover. In either case, the average inventory balance is often estimated by taking the sum of beginning and ending inventory for the year and dividing it by 2. As a general rule, industries stocking products that are relatively inexpensive will tend to have higher inventory turnovers, whereas more expensive items—where customers usually take more time before making a purchase decision—will tend to have lower inventory turnovers.

For instance, a company selling cheap products might sell the equivalent of 30 times their inventory in a year, whereas a company selling large industrial machinery might only cycle through their inventory 3 times.

Companies will almost always aspire to have a high inventory turnover. After all, a high inventory turnover reduces the amount of capital they have tied up in their inventory, thereby improving their liquidity and financial strength. Moreover, keeping a high inventory turnover reduces the risk that their inventory will become unsellable due to spoilage, damage, theft, or technological obsolescence.

In some cases, however, a high inventory turnover is caused by the company keeping an insufficient inventory, which could mean it is losing out on potential sales. Business Essentials. He studied the subject with passion and wants to grow his business. From his study, he realized that inventory turnover is the key to his business.

First, Derek talked to his accountant for inventory turnover ratio analysis. You need somewhat of an expert because the matter is more complicated than the abilities simple, web-based inventory turnover ratio calculator. His accountant comes up with a figure which Derek would like to increase.

Derek decides, from this, that he needs to make some changes. So he aligns a few strategies to move his products. First, he considers marking-down styles from the previous season as each season approaches. Similarly, he considers product give-aways with minimum transaction amounts. Then Derek considers the option of spreading contests and deals on social networking websites. He then finishes his evaluation by finding ways to turn his extra inventory into a tax write-off.

Derek applied his newly found skills and knowledge to better his business. As a result, Derek looks forward to the future. When your cash is tied up in inventory, it is bad news for your company. Make it your goal to increase inventory turnover to free up cash. Inventory turns can be artificially inflated for one period based on advance sales or a significantly discounted price.

For instance, a clothing brand selling last year's designs for a fraction of their original price may see increased inventory turns but falling profits. This is why it's important to look at several sequential periods of the company's financial statements to understand its true health. Elliott Taylor has been a writer and blogger since His articles have been published in the "Arbiter" and "Messenger Index" newspapers, as well as online venues.

Net-Sales-to-Inventory Ratio. Share on Facebook. Calculating Turnover The inventory turnover ratio is calculated by dividing the cost of goods sold for the period by the average inventory for the period.

Significance of the Numbers Generally, higher inventory turns equate to higher sales, especially when compared to a competitor in the same market.