What is Inventory Turnover Ratio?
This ratio shows how often inventory is sold and replaced over a given period.
How to calculate Inventory Turnover Ratio?
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
What is the business impact of Inventory Turnover Ratio?
Low inventory turnover might suggest overstocking, tying up cash and increasing carrying costs, while high turnover might indicate strong sales or potential understocking.
Industry benchmark for Inventory Turnover Ratio
For most industries, the ideal inventory turnover ratio will be between 5 and 10, meaning the company will sell and restock inventory roughly every one to two months.
How to improve Inventory Turnover Ratio?
- Improve demand forecasting to ensure quick turnover.
- Implement discount strategies for slow-moving items.
- Apply automated reorder points based on sales forecasting in your inventory management system.