What is a Good Inventory Turnover Ratio?
Retailers always want to make more money and maximize space. It’s a delicate balance between carrying too much or not enough inventory. What is a good inventory turnover ratio?
In terms of inventory management, you’re constantly balancing and trying to make sure that your product is in stock at the right time.
One of the key metrics you should be tracking is inventory turnover, which can help predict your stock needs. It’s one of those things that are so simple but also so important.
All You Need to Know About Inventory Turnover
Another way to know a good turnover ratio is by measuring the number of times it sells within a year. This can be done on an annual basis and monthly or quarterly.
When you look at the average inventory for an entire year, how much money your business is making becomes clear. There will be peaks and valleys in demand throughout a year, making up numbers when calculating yearly profits. You need to know what is a good inventory turnover ratio.
This is How to calculate stock turn
The equation for inventory turnover ratio is:
The COGS divided by the average inventory gives you a good idea of how much money is tied up in goods.
High Five Streetwear had an average of $250,000 and sold $500,000 in products this year.
If a company spends $250,000 on inventory and then sells $500,000 worth of products, they have two units left.
If you take the number of inventory turns and divide it by two, that’s how many times they had to restock their entire product line in a year. This shows us that products are selling well.
In a second example:
Luxe & company has had a good year, selling $100k worth of goods and holding an average inventory level of $350k.
What is a good inventory turnover ratio for retail?
The ideal number of days to have inventory before selling it is between 2 and 4.
A low inventory turnover rate could mean that either your sales team is underperforming or the popularity of your products has declined. The higher this number, the better you meet your business goals.
If your store’s inventory turns over nine times per year, you might need to buy more goods not to sell out and lose potential sales.
Measuring Your Inventory Turnover Is Beneficial
If you’re not yet aware of what is a good inventory turnover ratio, there are a few reasons why it might be time to start:
You’ll be in an excellent financial stead
Banks use inventory turnover as a key performance indicator (KPI) to judge the liquidity of their assets. The faster you can turn over what you have, the more money they’ll give to loan out.
Banks often ask for inventory as collateral when lending money, ensuring the goods are in demand and can be sold quickly.
You’ll make more intelligent business resolutions.
With our inventory, we can make smarter purchasing decisions and keep the store stocked so that customers will be more likely to buy what they want.
With this metric, you can make informed decisions about
- What things need to be ordered — If a particular item’s stock turn is too high, it could mean you need to order more of it.
- What units should be relegated to the discount aisle since the inventory isn’t moving quickly enough? It may be time to put them on the market before they’re gone.
- What has to be ordered ahead of time to allow for manufacturing, production, and shipment — Knowing how many times a product rotates each year will enable you to plan ahead of time to avoid stockouts.
When you know what a good inventory turnover ratio for your business is, you can calculate how much stock is needed on hand at any given time to meet demand. It will be easier for you to answer the questions above.
How Do You Boost Catalogue Turnover?
It’s essential to understand why you should measure stock turn (and how) and some of the ways that can help your inventory turnover ratio.
Track your inventory judiciously.
You can’t make changes to your inventory turnover without tracking it in the first place. That’s why you need a good POS and management system that lets you track sales, stock levels, etc. so that when they change over time, you know what needs adjusting.
These retail platforms make it easy to update your inventory and see how much you’ve sold. They also assist you in calculating the fluctuations to make things more precise.
Knowing how your company stacks up against others in your industry.
Knowing how your company stacks up against others in your sector is even more critical. “The average merchandise turnover in the retail clothing business for the 12 months ending June 2011 was 3.91,” according to the Houston Chronicle
If your store has a 4.0 stock turn rate, it means that you are right on par with the industry average.
It’s also possible that you need to reevaluate your sales, marketing, and inventory practices. For example, if the goods are not moving as quickly, it may be a problem with how fast they’re selling or what products people want.
The Business Development Bank of Canada has a calculator that can help you measure how your inventory turnover rates compare to other similar stores. If you’re curious about the comparison, head over here and give it a try.
Inform Your Team in All Honesty
When you are managing inventory, make sure that the other people in your company know what is happening. When items sell well or poorly, it’s important to share this information with everyone.
Here are some ways the different teams can work together:
- You can tell whether a product is a success or failure with your customers since salespeople are on the front lines of retailing.
- Your marketing staff may need to focus on increasing foot traffic through events or upgrading your product’s online aesthetics.
- Inventory turnover must be monitored by management and the purchasing department to see which items make the most significant profit and which are no longer worth ordering owing to a lack of consumer interest.
You might not have a big chain, but keeping everyone in the loop is essential. Check with your partners and employees how well they are selling your products.
Come up with ways to sell faster.
If your sales and marketing efforts are not enough to keep up with the demand for merchandise, it may be time to take a hard look at what you’re doing. There may be a surplus of stock.
Explore what works best for your store and see how it improves sales.
Here are a few ideas:
- Suggestive selling should be used.
- Upsell and cross-sell skills should be taught to your employees.
- Set realistic sales goals for your company and encourage your employees to achieve (and exceed) them.
- Identify the key attributes of successful retail associates and instill them in your employees.
- Assist your employees in overcoming their aversion to selling.
- Educate your employees on how to make a better first impression on customers.
As a retail store owner, you need to know which products are worth stocking and how much product to order. If your inventory turnover is high enough, then you can keep carrying these items without fear that they will sell out.
Now that you have an answer to the question: what is a good inventory turnover ratio? What are you going to do?