In contrast, low turn-over ratios indicate slow sales and negatively impact margins. When companies sell products at a faster rate, they generate revenue quicker, which leads to better profits. Moreover, it shows that the company can keep up with market trends and consumer demand by restocking items more frequently.Īnother benefit of a high inventory turnover ratio is improved profitability. This means that there’s less risk of unsold or expired goods, resulting in lower storage costs.Ī higher turnover ratio also signals that a business has enough cash flow to purchase new products as soon as they run out of stock. First and foremost, it indicates that the company is efficiently managing its inventory by selling products quickly and keeping minimal stock sitting on shelves. Why is a high inventory turnover ratio important?Ī high inventory turnover ratio is crucial for businesses to maintain their financial health. For example, retailers typically have higher ratios than manufacturers due to shorter product lifecycles. It’s important to note that what constitutes an ideal inventory turnover ratio varies across industries. On the other hand, a low inventory turnover ratio may indicate slow-moving or obsolete goods which tie up capital and resources in storage. The result represents how many times the company has turned over its entire stock in that time frame.Ī high inventory turnover ratio is generally seen as positive because it suggests that products are selling quickly and efficiently.
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To calculate inventory turnover ratio, divide cost of goods sold by average inventory for the same period.
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It indicates how quickly a business can sell its products to generate revenue. Inventory turnover ratio is a financial metric that measures the number of times a company’s inventory is sold and replaced over a certain period, usually annually. So settle in and get ready to learn all about the benefits (and potential drawbacks) of a higher inventory turnover ratio! What is Inventory Turnover Ratio?
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In this post, we’ll explore what this key performance indicator is, why it’s important to have a high one, and how you can improve yours. But how do you know if your inventory is moving fast enough? That’s where the inventory turnover ratio comes in. Welcome to our blog post on inventory turnover ratio and why it matters for your business! As a procurement expert, you know that managing inventory is crucial to the success of any company. Is A Higher Inventory Turnover Ratio Better?