The Benefits of a Good Inventory Turnover Ratio
If you’re in business, then you know that a good inventory turnover ratio is essential to success. But what exactly is this key metric, and why is it so important? The inventory turnover ratio measures the number of times your inventory turns over or sells out during a given period of time.
A high turnover rate means that your products are selling well and you’re keeping up with customer demand. This is obviously a good thing! On the other hand, a low turnover rate could indicate that your products aren’t selling as well as they should be, which can lead to all sorts of problems down the road.
There’s no magic number for what constitutes a good inventory turnover ratio – it varies depending on factors like the type of business you’re in and the nature of your product line. However, Skubana’s calculator can help you determine an ideal range for your company based on industry standards. Once you know where you should be aiming, you can take steps to improve your actual numbers if necessary.
In this article, we’ll discuss how to find the ideal inventory turnover ratio for your business. We’ll consider your industry and size and share practical tactics for reaching that goal.
What is Inventory Turnover Ratio?
The inventory turnover ratio is a key metric for assessing a company’s sales and inventory efficiency. It is calculated by dividing the cost of goods sold by the average inventory for the same time period. A high inventory turnover ratio indicates that a company is selling its goods quickly and efficiently, while a low ratio indicates that the company may be struggling to move its goods.
Your inventory turnover ratio (ITR) is the number of times you sell all your inventory over a given period (such as a year). You can calculate it using the turnover ratio formula: Cost of goods sold (COGS) / average inventory value. So, if your COGS for 2019 totaled $300,000 and your inventory was worth $60,000, your ITR would be 5.
What Is a Good Inventory Turnover Ratio?
A good inventory turnover ratio is typically between 5 and 10 for most industries. This indicates that you sell and restock your inventory every 1-2 months, on average. Having a healthy inventory turnover ratio is important for keeping your business running smoothly and avoiding stockouts.
This ratio is ideal for having just the right amount of product in stock without overstocking or running out of stock.
While it’s helpful to be aware of the average inventory turnover ratio (ITR) in your industry, this number shouldn’t be used as a benchmark for your own business. Instead, focus on optimizing inventory turnover to ensure that you have enough inventory on hand without having to reorder too frequently.
Inventory turnover is a key metric for any business, and optimizing it should be a key goal of inventory control. However, businesses need to look deeper into inventory turnover differences based on industry, the size of the business, and other factors in order to optimize their inventory management.
5 Tactics To Improve Inventory Turnover
If you have found that you have low turnover, there are several tried-and-true approaches that are worth exploring right away.
“Bundling is a relatively easy way to offer new products that compliment your existing line. There’s more potential for success than failure.” Click To Tweet
Dr. Vinnet Kumar, Professor at HBS said.
Product bundles are a great way to get people to buy related products together. Amazon’s virtual bundles were a pioneer in this area, and they’re still a great way to get people to buy what you want them to.
Almost every business can create bundles of their products to increase sales.
Every business can find a way to offer customers a way to clear their inventory of a certain product all at once.
When it comes to product bundling, it’s always best to take a data-driven approach in order to increase your chances of success. This is something that Professor Kumar himself has stated. By taking this approach, you’ll be able to make more informed decisions about which products to bundle together.
It’s not a good idea to offer a product bundle without also offering the option to buy each product individually, according to the data.
Offering products as bundles are a great way to increase profits for your brand. It is important to also offer the option of buying each item separately. An order management system such as Skubana can help you create and price your product offerings.
Changes to Marketing and Promotions
Discounts and promotions are an easy way to boost sales on specific items. You can also use them to encourage customers to refer their friends.
A well-executed marketing program can work wonders for your inventory turnover rate. Tools like UpSell by Bold can increase sales by suggesting additional products to customers who purchase from you. This can improve your stock turnover.
Using the same example, using Bold Upsell, you can offer your customers complimentary accessories to go with their purchase, such as matching laces or suggest a premium item in a similar or complementary color.
In order to take advantage of seasonal trends, it is important to first understand the natural purchasing patterns of your customers. By observing these patterns, you can develop targeted promotions that will help increase your inventory turnover rate. Keep in mind the relative seasonal performance of different sales channels when crafting your strategy in order to maximize results.
As you examine seasonal performance trends across different sales channels, you can identify opportunities to drive quicker sales with targeted promotions. By aligning your promotions with existing customer purchasing patterns, you can maximize your inventory turnover rate and improve your bottom line.
If you’re looking to grow your inventory, there are funding solutions that provide capital and cash specifically for that. For instance, with the payment provider, Payability, you can get an advance on your future receivables. This frees up your available funds so you can invest them back into the business.
With eCommerce, it’s easier than ever for buyers to shop around for the best price. This has caused many retailers to price their products competitively, often undercutting their competition by a small amount.
Fortunately, the web has also made it easier for sellers to adjust their prices in real-time. This allows them to undercut competitors by a small margin and stay ahead of the competition.
Repricing. Com is a service that allows you to automatically adjust your prices on Amazon, based on rules that you set. This makes it easier to beat your competitors by a slight amount, which makes it easier for customers to find your product.
Broadly speaking, it can be good to periodically review your pricing structure. This doesn’t mean you should necessarily reduce all your rates; lowering your price doesn’t always mean you’ll increase your sales.
Rather than focusing on price, explore other established strategies that could work better for your small business. These include things like offering a premium service, providing faster shipping, or charging more for in-demand products.
Improving Inventory Replenishment
If your sales are too slow, this can result in you missing potential deals. Thankfully, if you have your historical data, this is a simple problem to fix.
Automated inventory management tools can help streamline the ordering process by basing reorders on sales data. This helps to prevent overstocking and under-ordering, while also limiting excess inventory.
*The Order Cycle is the length of time needed before you would use up supply to meet your supplier’s target order requirement.
Reviewing Product Portfolio Frequently
Stocking what’s profitable instead of what doesn’t sell is key to improving inventory turnover rates.
Some companies focus so much on increasing sales that they forget to consider their profit margins. If a single product takes forever to move, then it’s costing you money, even if it does eventually get sold.
Knowing which SKUs are profitable is essential for business owners. By calculating inventory turnover by SKU, you can figure out which products are selling and making a profit.
If you have thousands of SKUs, don’t do this manually; automate the process with e-commerce inventory optimization software.
Calculate Inventory Ratio with Skubana’s Calculator
The first step to understanding this inventory turnover formula is to first understand what the turnover rate is.
To calculate your Inventory Turnover Ratio, divide your total cost of goods sold by your average inventory value.
To find your average inventory value, add together your beginning and ending inventory balances for a single month, then divide by two. This will give you your ITR for the year.
Inventory Turnover Ratio (ITR) = Total Cost of Goods Sold (COGS) ÷ Average Inventory Value
The Inventory Turnover Ratios are used to measure how often a business turns over its stock of products.
If your average inventory value is $100,000, then your sales for the year would be $500,000.
The ITR calculation will show that you replaced your inventory 5 times over the year.
The “Days’ Sales of Inventory” is the amount of time it will take you to sell all of your products. You can calculate the “Days’ Sales of Inventory” by multiplying the number of years you have left on your lease by your average monthly sales.
In this scenario, your days’ sales of inventory would be approximately three-quarters of a month.
Days’ Sales of Inventory (DSI) = 365 ÷ Inventory Turnover Ratio (ITR)
The number of days’ worth of inventory you have on hand is equal to 365 divided by your inventory turnover ratio.
While using software is the best way to calculate your inventory turnover rate, you can get a quick estimate from your balance sheet.
Use the equation above or this handy online tool to calculate your turnover rate.
A good inventory turnover ratio is essential for any business that wants to be successful. Skubana’s calculator can help you determine the right level for your company. Once you know where you should be aiming, you can take steps to improve your actual numbers if necessary.