What is the inventory turnover Ratio ?
What is the inventory turnover Ratio ?
Hello everyone, welcome to today’s video guide on inventory turnover ratio, everybody right from small shopkeepers to large retail companies, keep track of their inventory turnover ratio, do you keep track of your inventory ratio?
so what exactly does it mean? Inventory turnover ratio is how frequently a company sells its inventory in a given period, it is an Activity ratio that indicates the efficiency of your supply chain and the management’s ability to meet customer demand.
To determine this ratio, we divide the COGS. That is the cost of goods sold by the average inventory before the given period. Consider an example for a clothing company name ninja turtle company, it has COGS equal to 300 dollars million USD, and the average inventory is equal to 25 dollars million USD, then We.use the formula COGS DIVIDED BY average inventory.
The inventory turnover ratio comes out to be 12. This means that ninja turtle company sold and replaced its entire inventory 12 times. Imagine if your competitor pink bunny has an inventory turnover ratio of 8 times, what does it means here?
It means that ninja turtle sells its inventory faster, which is both necessary and useful for the clothing industry. Slower sales say that pink bunny might end up without of fashion apparel, and it also means that pink bunny is less confident about sales as compared to ninja turtle if both of them have the same stock carrying capacity, the pink bunny will profit eight times. Wow, ninja turtle will profit 12 times during the year, if you have less stock you will find it difficult to fulfil orders even if you backorder those items you will still lose out a few orders.
On the other hand, if you have a large quantity of stock piled up in your warehouse, it will hurt your bottom line, tie up your cashflow. in your inventory. so, do you think a healthy inventory turnover ratio is a sign of decent profitability? inventory not. only to control you’re in stock and out stock, it have so much more than this.
Do you control your turnover inventory ratio so that you know what is the causes for your inventory? Why overstock? Why not be able to meet customer demand? What happens to your inventory? Too little marketing campaign? Or strong sales insufficient stock.