What Is a Good Number of Inventory Turns for a Business?
If you’re in business, chances are you’ve asked yourself “what is a good number of inventory turns?” at some point. It’s a valid question – after all, optimizing your inventory turnover ratio can have a big impact on your bottom line.In this blog post, we’ll discuss how inventory turnover ratio works and give 5 optimization techniques to help improve your business’s bottom line.
Inventory Turnover Definition?
Before we answer the question, ”what is a good number of inventory turns”, let’s start with a quick definition of what inventory turnover actually is.
Inventory turnover is a key metric for businesses, as it can give insights into how quickly a company is selling its products. A high inventory turnover rate may indicate that a company is efficient at selling its products, while a low rate may suggest that the company is struggling to move its inventory.
Most companies have several sales cycles a year, but it varies depending on the industry and the product.
Consumer packaged goods (CPG) have a high inventory turnover rate due to the constant demand from customers. On the other hand, luxury items such as high-end handbags take longer to sell and have a lower inventory turnover rate. This is because there are fewer buyers for these types of products and the production process takes longer.
There are a number of factors that can cause a business to have a high turnover rate, such as changes in customer preferences, problems with supply chain management, and over-stocking of inventory.
Generally, however, items drift along somewhere in the middle, meaning all companies need a handle on what’s moving and how quickly.
All companies need to keep track of what inventory is selling and how quickly it is selling. This helps businesses determine things like pricing strategy, supplier relationships, promotions, and product lifecycles.
The inventory turnover ratio is a key metric for informing strategic decisions related to pricing, promotions, product lifecycle, and supplier relationships.
A low inventory ratio suggests weak sales, lackluster market demand, or an inventory glut.
How Inventory Turnover Ratios Work
Average inventory is used to smooth out changes in inventory levels that can occur over short periods of time, such as days or months. This provides a more accurate picture of inventory levels and helps to avoid fluctuations that can distort the data.
Seasonal sales can cause inventory levels of certain items to fluctuate greatly. For example, patio furniture and artificial trees are often in high demand just before the season starts. However, once the season is over, these same items see a sharp decrease in demand, leading to depleted stock levels.
However, the turnover ratio can also be calculated by using the ending inventory numbers for the same period as the cost of goods sold (COGS) number. This provides a more accurate picture of how quickly inventory is moving and allows for comparisons to be made between different periods.
How Do You Calculate Inventory Turnover Ratio (ITR)?
To calculate the turnover rate, divide the market value of your inventory by the value of your total stock. Alternatively, you can measure your cost of good sold by dividing it by the total amount of products you have in stock.
To calculate the average inventory, subtract the beginning inventory from the ending inventory and divide that number by two.
The average inventory is the sum of the beginning and the ending inventory divided by 2.
If a company does not have fluctuating sales throughout the year, they can simply use their total inventory of goods at the end of the year. If the company has more products, however, they should divide their yearly amount by 12 to get a more accurate number.
The Inventory Turnover Ratio is a measure of the number of times a business’ stocks are turned over, or sold, in a given year.
The Inventory Turnover Formula:
Inventory Turnover Ratio = Cost of Goods Sold / Avg. Inventory
What Is a Good Number of Inventory Turns
In general, a higher inventory turnover ratio is indicative of strong sales. Conversely, a lower ratio may suggest weak sales andor decreasing market demand for the goods in question.
Not all products have the same turnover rate. Some high-end items have very low turnover, while lower-priced items are easier to sell.
Since tractors and diamond necklaces aren’t purchased as often, the turnover rate for these products is much lower.
A low or high turnover rate is counter-productive. This may mean that you are not buying the right amount or right type of product to support your rate of sale.
Or, you may be leaving money on the table—try raising your prices to see if that increases your revenue without hurting your profit margins.
Retail inventory management is both an art and a science. To be successful, you need to understand sales patterns, profit margins, seasonality, and other factors.
Inventory Turnover Optimization Techniques
Let’s now understand why it is important to measure stock turnover and look at ways to increase inventory turnover.
Use an efficient inventory management system
First, it is impossible to increase or optimize your inventory turnover rate without the right tools to measure it. Businesses need both an efficient POS and inventory management software to track sales and generate reports in real time.
A POS system with integrated inventory management will allow you to manage inventory in a seamless way. It will also automatically record sales figures, reports on other aspects of your business, and provide detailed reports.
A good POS Inventory Management Software can automate a lot of manual tasks, which saves you time and reduces staffing costs.
Sell slow-moving inventory
If inventory turnover is slow, it might be time to increase sales and marketing efforts to sell more products.
There is no single strategy that will work in all retail stores, but there are strategies that can help.
Some sale ideas:
- Train staff to upsell products or cross-sell promotions.
- Encourage suggested selling.
- Incentivize your team and set sales targets.
- Training staff on effective selling techniques.
- Review visual merchandising.
- Sell your slower inventory on a time-sensitive basis.
Proper demand forecasting
Inventory levels can be affected by a variety of factors, including seasonal demand, occasional products and trends. It is important to eliminate guesswork and forecast orders and inventory stock levels using quarterly and yearly sales figures.
It is better to analyze sales data and identify the most popular and trending items, so that these numbers can be incorporated into sales forecasts or budgets.
Your business’s marketing strategy could be a key tool to increase inventory turnover rates. A good marketing plan will allow you to concentrate on items that sell more and reach more customers.
You can grow your retail business by using all marketing channels. An influx of customers can increase sales, which can lead to higher inventory turnover.
How to improve marketing:
- Social media – Use platforms like Facebook, Instagram, Twitter and Tik Tok.
- A simple to navigate website.
- Email marketing
- Customer Loyalty Programs
- Paid advertisement
- Use an SEO strategy to improve search engine results.
Smart pricing strategies
Pricing can be tricky, especially if you sell products globally through an ecommerce platform. Most businesses will quickly realize that a single pricing strategy won’t work for all items.
It is best to use a multilevel pricing strategy for inventory that is based upon relative factors. These could include:
- Occasional items that must be sold by a specific time, ie. Christmas and Easter supplies.
- Seasonal variations
- Shipping costs
- Bulk Buy Discounts
- Current trends
Inventory turnover is a measure of how often a company sells and replaces its inventory over a period of time. So, what is a good number of inventory turns? Ideally, you want your business to have as high an inventory turnover ratio as possible – this indicates that you’re efficiently selling through your stock and generating revenue.
However, there’s no magic number when it comes to inventory turns – it all depends on the nature of your business and what product mix you carry. That said, most businesses aim for an annualinventory turnover rate between 4 and 10 times.Now that we’ve answered the question “what is a good numberof inventory turns,” let’s take a look at 5 optimization techniques you can use to improve your own ratios: