What is inventory turnover? Calculation formula and meaning

Effective inventory management is always a difficult problem for businesses. If the amount of inventory is too large, it will be difficult for you to convert input capital into revenue. On the contrary, if inventory is too little, production and business activities must take place moderately, and it will be difficult for businesses to maintain market share. Therefore, to easily review and manage inventory, businesses are starting to come and choose inventory turnover ( Inventory turnover ) as a perfect solution.

So what is inventory turnover? What does this index mean for businesses and how is it calculated? Let's find Answers in the article below.

What is inventory turnover?

Inventory turnover Inventory turnover is a measure of the number of times a business turns over inventory (sells out and restocks) in a given period of time.

This is an important financial index, helping businesses have an overview of sales speed and current level of production and business efficiency. From there, businesses can make more correct decisions about the appropriate inventory flow, the amount of goods to produce and the most appropriate selling price.

How to calculate inventory turnover accurately

To determine the number inventory turnover To be most accurate, businesses can apply the following 3 steps:

Step 1: Clearly plan the time period that needs to be calculated inventory turnover, usually by year, quarter or month. If you are a business with a high level of inventory turnover, such as retail or e-commerce, you can choose to calculate turnover on a quarterly or monthly basis. If you are a business with low turnover, such as the manufacturing sector, or high-end goods segment, you can choose to calculate annually or quarterly.

Step 2: Collect accurate data on cost of goods sold (Cost of Goods) and average inventory value (Average Inventory Value) of the product group that needs to calculate turnover.

Step 3: Calculate numbers inventory turnover.

• Numerical formula inventory turnover:

Inventory turnover = Cost of goods sold / Average inventory value

In there:

Cost of goods sold determined over the same period of time that the business needs to calculate turnover, such as year, quarter or month.

• Formula to calculate Average inventory value:
  

Average inventory value = (Beginning inventory value + Ending inventory value) / 2

• Formula to calculate the number of days in one inventory turnover as follows:

Number of days of inventory turnover = Number of days in the accounting period / Number of inventory turnover

In there:

If an enterprise has an accounting period of year/quarter/month, the corresponding number of accounting days will be 365/90/30 days.

Example of how to calculate inventory turnover:

In fiscal year 2022, Walmart, the largest retailer in the United States, had a cost of goods sold of $429 billion, an ending inventory value of $56.5 billion, and an opening inventory value of $44 billion. .9 billion dollars. Inventory turnover of Walmart in 2022 will be calculated as follows:

Inventory turnover = 429 / (56.5 + 44.9)/2 = 8.5 (rounds)

Number of days per rotation = 365 / 8.5 = 42 (days).

Thus, in fiscal year 2022, Walmart's inventory turns over 8.5 times. On average, Walmart rotates its inventory every 42 days.

Meaning of inventory turnover

Index inventory turnover High shows that the business operations of the enterprise are very effective. However, you also need to be careful because a high turnover ratio can also be the result of insufficient inventory. In cases where market demand increases sharply, but inventory is not enough to supply, businesses are easily at risk of losing customers and market share to competitors.

On the contrary, coefficient inventory turnover Low levels can be a sign of inefficient business operations, or too much inventory, leading to congestion. Enterprises need to review their business and marketing strategies, and evaluate the current market needs of the industry to have a solution.

Index fluctuations inventory turnover of businesses will be of special concern to the following subjects:

• Capital financing bank: They care about how the business is progressing, whether the revenue from the source of goods is stable and whether the business has enough money to repay the initial capital and interest.
• Board of Directors and shareholders: Is the capital invested in the business by shareholders and the board of directors profitable, or is it potentially risky because of the business's inventory flow.
• Board of directors, management board and sales department: They need to consider whether their business and marketing strategies are generating revenue effectively and then come up with a solution.

• Potential shareholders/investors: They evaluate the business's development prospects through revenue each period, before deciding to invest.
  

Factors affecting inventory turnover index

Purchasing needs

Market demand is a factor that directly impacts the index inventory turnover of business. Purchasing demand will be proportional to inventory turnover, if the market demand is greater, the turnover coefficient is higher, equivalent to high sales volume and high re-stocking frequency. On the contrary, low purchasing demand also means low turnover ratio, leading to stagnant inventory flow, potentially causing many risks in terms of additional costs for businesses.

Purchasing trends

Sensitivity to market trends has a significant impact on the inventory turnover index. The market's purchasing power tends to increase sharply on major holidays and year-end periods when there are bonuses, or it tends to decrease sharply when inflation and prices escalate. Businesses need to conduct market research more closely to grasp customer psychology, predict market trends effectively, and then plan a reasonable inventory strategy.

Sales method

In cases where demand and purchasing power increase, but the business strategy of the enterprise is ineffective and does not create the urge for customers to spend more, the inventory turnover index cannot reach the expected level. hope. Therefore, businesses need to build a chain of marketing, pricing and product strategies in parallel with training the sales team to boost sales, thereby continuously rotating inventory sources.

Review and monitoring cycle

Evaluation and review cycle inventory turnover also contributes to high efficiency in inventory management. Through each review cycle, based on the inventory turnover ratio, businesses can evaluate whether current business strategies are appropriate or not, and whether the current inventory is at a safe level for production. or there is a surplus,... For businesses that have just entered the market, inventory turnover should be calculated on a short-term cycle, quarterly or monthly, to promptly review and evaluate the effectiveness of business operations.

How to optimize inventory turnover

Based on influencing factors inventory turnover Above, your business can implement measures to improve this index as follows:

• Negotiate more effectively with suppliers to optimize input material costs, thereby offering more competitive selling prices.
• Successfully sketch customer portraits, clearly understand customer needs, desires, and behaviors regarding the industry and products that the business operates in to be able to predict purchasing trends, thereby preparing product sources. more reasonable storage.
• Stimulate purchase demand and increase order value with product marketing strategies, customer loyalty programs, vouchers or product discounts...
• Classify the business's product groups, which are the best-selling/slow-selling product lines, where is a high-end/affordable product line for planning and preparing effective supplies.
• Implement appropriate review and evaluation cycles. If you are a long-term enterprise, you can choose a cycle of every year or longer; On the contrary, if it is a new business inventory turnover should be calculated over shorter periods.

In addition to the above methods, businesses can consider applying smart warehouse management technology solutions, the most prominent of which are warehouse and supply chain management software. Viindoo Inventory

So what are the outstanding features? Viindoo Inventory become different from current warehouse management software on the market?

• Inventory tracking: Using two methods Lavoisier & Double entry, any movement of goods will be possible coming Inventory saves and fully updates information about history, quantity, related exchanges, etc.
• Control by batch and series: The amount of inventory will be ok coming Inventory is saved and clearly classified. Based on this complete data source, businesses can easily trace the origin of goods from the supplier to the customer.​
• Control inventory age and term: coming Inventory provides visual reports on inventory age, shelf life of inventory sources, and warnings about product expiration dates so businesses can plan for handling.
• Warehouse costs: coming Inventory updates all costs related to the process of importing goods to the warehouse: taxes, fees,... At the same time, automatically creates an allocation entry to adjust the warehouse price of goods.
• Inventory report: All types of reports for above inventory management coming Inventory such as warehouse performance reports, inventory import and export reports, inventory forecasts,... will all be automatically updated and displayed visually with specific data, helping businesses easily monitor and optimize logistics index priority
• quality control: coming Inventory helps your business define quality criteria and perform checks during receiving, shipping, placement, production or returns and automates the quality check process.

Based on the benefits it can bring, warehouse management software coming Inventory can help businesses optimize inventory flow, thereby improving and enhancing indexes inventory turnover.

Conclude

To summarize, there is no general formula for the index inventory turnover of each business. An index inventory turnover is considered "good" when the amount of inventory fully meets production and business needs, helping businesses free up input capital, thereby increasing stable revenue and profits.

It should be noted further, index inventory turnover High levels are not always good for businesses, because this is a sign of a shortage of goods in the warehouse. If not corrected promptly, it can have a negative impact on business operations. Businesses need to periodically monitor and evaluate inventory turnover, considering current inventory compared to current market demand. From there, make adjustments if necessary to better adapt to changes in customer needs and tastes in the future.