What Is a Good Inventory Turnover Ratio for Retail?
If you’re a retailer, you might be wondering what is a good inventory turnover ratio for retail. The average retail business has an inventory turnover ratio of 10:1, meaning they sell ten times their inventory each year. However, there are ways to move your inventory faster and increase your sales.
I remember when I first started my retail business, I didn’t know what is a good inventory turnover ratio for retail and I didn’t want to have too much stock on hand because it ties up capital and can lead to losses if the items don’t sell. But at the same time, I didn’t want to run out of stock and lose potential sales.
It was a delicate balance that took some time to figure out. Eventually, I realized that having an efficient inventory management system was key to keeping track of my inventory levels and ensuring that my shelves were always stocked with the right products. By implementing these strategies, I was able to increase my sales and reduce my overall costs. If you’re struggling with managing your inventories, hopefully, these tips will help you turn things around!
What is inventory turnover?
Inventory turnover is a measurement of how many times inventory is sold in one year.
The following text discusses the calculation of an accounting metric, which can be done on a yearly, monthly, or quarterly basis.
When you average out your inventory for the year, you get a better understanding of your business’s financial standing. This gives you an idea of what to expect in terms of sales and helps you plan for future growth.
There will be times throughout the year when your inventory numbers will be higher or lower due to certain holidays, back-to-school shopping, and seasonal apparel shopping.
As a retailer, you should always be looking for ways to increase sales and profits. However, you need to strike a balance between having too much or too little inventory.
Having too much or not enough of something can lead to problems. For example, having too many products in stock can tie up a lot of capital, while having too few may mean losing out on potential revenue.
Keeping the right balance between products and having enough of each product on hand at all times can be a difficult process. However, using inventory management as a method can help you keep everything in check.
Knowing your inventory turnover rate helps you understand how often you are selling and how much product you are moving. This data is important for planning and managing your business.
What is a Good Inventory Turnover Ratio for Retail?
The inventory turnover ratio expresses how many times a company’s inventory is sold and replaced over a period of time. Most often, this is calculated over the course of a year.
Many businesses also calculate inventory turnover quarterly or monthly. This ratio is a crucial parameter in retail businesses. It gives you insight into how quickly you sell your overall products. This information can be used to make a strategic business decision about inventory management, and budgeting.
Armed with this phone number, you have a clear idea of your basic financial situation.
How do you calculate your inventory turnover ratios?
Inventory Turnover Ratio = Amount in Sales of Products GeneratedAverage Inventory Output: To calculate your inventory turnover ratio, simply divide the amount of sales generated by your average inventory.
The inventory turnover ratio measures how many times a company sells its average amount of products.
Example 1 In order to better understand how to use the inventory turnover ratio formula, below are two examples of how this number might work in the real world. Example 2
Inventory Turnover Ratio = Total Sales Average Inventory For the retail shoe business, the inventory turnover ratio would be calculated as follows: Inventory Turnover Ratio = £100,000£50,000 = 2
The inventory turnover ratio equals 100,00050,000.
Their 2.0 ratio means that they turn their stock over twice per year.
What we can take from this is that the business is selling at a rate where they have to restock their inventory twice a year. This is good news as it means they are selling profitably.
If you still don’t understand, let’s try again.
A hair salon business made over $200,000 in 2019. They held an average of $500,000 in product.
What is the Stock Turnover Ratio?
The Inventory Turnover Ratio is equal to £200,000 divided by £500,000, which is 0.4.
Their current ratio of sales to stock is 0.4.
The retail business is holding and spending on too much inventory, as indicated by the answer obtained.
The retail business is holding and spending too much inventory. They have money tied up in stock, and they are undoubtedly spending more to store them than they are making in revenue from selling.
Inventory turnover formula: How to calculate stock turn?
The formula for calculating Inventory Turnover Ratio is:
The ratio of COGS to average inventory
High Five Streetwear had $500,000 in sales this year and an average inventory of $250,000. This gives us a stock turnover of 2.
This means that for every $250,000 worth of inventory on hand, the store has $500,000 in sales.
Their 2-year average for products turning over is 2, meaning that on average, they replenish their inventory levels twice a year. This shows they are turning a profit on their products.
In a second example:
This year, the luxury brand, which sells $100,000 in products, had an average of $350,000 in inventory.
$100,000 in revenue $350,000 in cost of goods sold = 0.29.
Their low turnover rate means they are paying too much on storage costs and items aren’t selling fast enough.
If a business is over-stocked with inventory, it could be a sign of poor management, or it could indicate that there is a local, national, or global recession.
The importance of understanding the inventory turnover formula cannot be understated. However, to ensure accuracy, automating the calculation process is key. Your POS system likely has reporting capabilities that can handle this automatically, making stock turn a breeze.
Why do you need to calculate inventory turnover?
If you aren’t already tracking your inventory turnover rate, here are a couple reasons why you might want to consider doing so:
Inventory Turnover is a Key Performance Indicator (KPI) for Your Business
The inventory turnover rate measures how quickly your inventory is turning over. This metric is an indicator of how healthy your company is, and it’s also helpful for securing loans.
If you’re looking to borrow money using your inventory as security, lenders will want to make sure that it’s easy to sell and that they can quickly turn it into money. That way, they can be sure that they can recover their money.
Closely Monitoring Stock Turn Can Make Smarter Business Decisions
If you keep track of how often your goods are selling, you can make better decisions about what to buy, how much to order, and what to sell. This will help to keep your merchandise moving and sell more of what customers want.
This statistic can inform you on:
This KPI will help you figure out which goods you should stock up on, which you should discount, and which you should pre-order.
When you have a better understanding of your turnover rate, you can answer these questions more easily and take action.
How to Improve Inventory Turnover
Now that you’ve learned how to measure your Inventory Turn, let’s take a look at how to improve it. These techniques will help you manage your inventory levels more effectively and increase your profits.
Know Your Benchmarks
Knowing your industry’s average inventory turnover ratio can help you determine how well your warehouse is managing its product.
If your clothing store has a 4.0 inventory turnover, it means you’re keeping pace with the average for your type of store.
If your inventory of goods isn’t selling as fast as you’d like, try evaluating your sales and marketing strategies. Perhaps you can make some adjustments to help move your merchandise faster.
The BDC has a handy tool to help you compare your inventory turnover rate to other businesses. Click here to check it out.
Purchase a Solid Inventory Management System
To improve your turnover rate, you need to track it. This is why having a good point of sale and stock management system is crucial. It allows you to keep track of your sales, and your inventory levels in real time.
These e-commerce platforms make it easy to manage your stock and report on any changes in your inventory so you won’t need to do any math yourself.
Using an Excel inventory and sales template is a great way to keep track of your inventory and sales. With this template, you can easily see your retail data at a glance, so you can make informed decisions about your business.
We put together some spreadsheet templates that will automatically calculate the important business performance metrics such as gross margin return on investment, conversion rates, and inventory turnover.
Get Your Team in Sync
The sales, procurement, and marketing departments should work together to ensure that there is adequate inventory of goods. By sharing information about the products that are moving quickly, and the ones that aren’t, the various departments can make sure that they have enough stock on hand to meet demand.
The various teams can work together in different ways.
The sales team is on the front lines of retail, and they know which goods are a hit or a miss with consumers. The marketing team may need to work on events to increase traffic, or they may need to improve the online images of certain products for better results. The management and the buying team need to review the turnover rate of your inventory to determine which of your merchandise generates the most profits and which aren’t worth keeping in stock.
It’s crucial to keep your employees and partners on the same page, especially if you’re running a small retail business. Meet up with them regularly to make sure everyone is aware of how quickly your products are moving.
Come up with ways to move inventory faster
If your sales are not where you’d like them to be, you may need to step up your marketing efforts.
There is no one way to improve sales in retail stores; different stores have different needs and strategies should be tailored to fit those needs. The best way to figure out what works for your store is to experiment with different tactics and strategies to see what brings in the most sales.
Here are a few ideas:
If you want your inventory to move more quickly, there are a few steps you can take. First, you can implement some suggested-selling tactics to help increase orders. Second, you can teach your sales staff to up-sell and cross-promote. Third, you can set realistic goals for your sales team. Fourth, you can motivate your salespeople to overcome their fear.
If you’re a retailer, knowing what is a good inventory turnover ratio for retail and having an efficient inventory management system is key to keeping track of your stock levels and ensuring that your shelves are always stocked with the right products. By implementing these strategies, you’ll be able to increase sales and reduce overall costs.