What is your business’ inventory turnover rate?

Taking care of your online business is more than a hassle if you’re not organized well enough, especially nowadays, when retail businesses are active on multiple channels and also acting as a hybrid between brick & mortar stores and online shops. Competition is way tougher now, as sales see no boundaries or borders and orders are shipped throughout the globe from all over to all over the world constantly.

A smart retail business owner must take into consideration a multitude of factors that have a direct impact on his activity. Let’s say, for example, that some of your products sell faster compared to others or sales of certain products depend on the season (like for clothes, shoes or even car tires), a well-organized warehouse can be decisive in regards to the success of your sell rate.

And losses are an everyday occurrence just in regards to inventory management, not to mention others. Statistically speaking, each year, $1.1 trillion is lost in revenue as a result of overselling or out-of-stock issues and $222.7 billion is lost because of the inability to synchronize inventory data. Approximately 43% of retailers continue to practice manual inventory tracking by using spreadsheets or pen and paper in 2019.

 

Inventory turnover rate calculation

In order to know exactly what your business lacks or, au contraire, which are its strengths, calculating your inventory turnover is an unspoken rule. Basically, businesses that have a low-inventory turnover are not moving product through the marketplace quickly enough, while businesses with a high-inventory turnover have excellent sales, and are moving inventory fast.

 

 

The turnover rate with the highest return is the best rate for any business but it can also imply insufficient inventory. The former is desirable while the latter could lead to lost business. Sometimes a low inventory turnover rate is a good thing, such as when prices are expected to rise (so in the case of inventory set to satisfy a continuously rising demand) or when shortages are anticipated correctly.

The speed at which a company can sell inventory is a critical measure of business performance. 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 buyers have to return to the shop for new items.

 

inventory turnover rate calculation

But how is your inventory turnover rate actually calculated? The answer is by dividing the cost of goods sold by the average inventory.

 

 

 

In order to do that, you will have to estimate your average inventory. Do so by adding your starting and ending inventories together and divide the sum by two to get an approximate average inventory level. You can use the current inventory, but sometimes there are significant changes in the size of your inventory so the approximate average is more accurate.

 

inventory turnover rate formula

Now it’s time to divide the cost of goods sold by the average inventory. For example, if the cost of goods sold for a certain period of time is $75.000 and your average inventory is $25.000, you have $75.000 divided by $25.000 for an inventory turnover rate of 3.0.

 

 

The ideal scenario for the inventory turnover would be if the rate returns the highest profit margin. A company that’s maximizing turnover rates without sacrificing its margins is growing and obtaining solid revenue. A company with high turnover and constantly decreasing margins is not at all sustainable. A company with low-turnover rates and low-margins is not a great scenario either.

 

Nventree - inventory management softwareAs a business owner, you should totally strive for high-turnover at a high-profit margin, with a sustainable business model to maximize long-term viability and profitability.

The better you’re able to manage your inventory, the more profitable your business will be. With Nventree you can effortlessly synchronize your inventory from any source and update stock levels automatically across all your marketplaces or sales channels, such as eBay, Amazon and/or your personal webshop.

 

 

Having your inventory well synchronized in real time, you will be able to display your entire inventory on all sales platforms, giving you the opportunity to get the most conversions.