This is the average number of times per year that a retailer sells its inventory. what is this?
Every retailer is curious about what they sell or how much money they make in a given time. However, inventory management can be a hassle that negatively impacts numbers. That's why retailers need to have another metric in their hands to understand predictive sales and how much inventory they need. Show
To do the math, it's crucial to understand what inventory turnover ratio is. It will help you analyze what you can sell, plan your purchasing amount and frequency while giving you a better analysis of how efficient your sales are. It's a simple but essential metric that needs to be monitored according to your business needs. Let's get to the basic definition of inventory turnover and then dive deeply into the tactics and methods to optimize the ratio! Dor - People Counting DashboardDid you know that a 1% increase in your store’s conversion rate can mean a 10% increase in revenue? Click here to discover how Dor can help you understand your foot traffic data and make more profitable business decisions. Ready to purchase? Complete your purchase in just minutes! Inventory Turnover Ratio Formula - Image: EDUCBAThe inventory turnover, or sometimes referred to as “inventory turns,” “stock turn,” or “stock turnover,” is basically how many times a product is sold and replaced in a given time. Inventory Turnover Ratio = Cost of Goods Solds / Average Inventory This ratio is used to determine how your business performs overall and how efficient your inventory management works. The ratio is calculated with a few determinants, and generally, the higher the ratio is, the better the business performs. However, it's safe to say the final number is varied from industry to industry. Related: 15 Key Metrics (KPIs) to Measure Retail Store Performance Why is inventory turnover so important for retail?
However, to achieve these all, you need to know the inventory management metrics and how to calculate them. What are inventory management metrics?
Here are some of the most important inventory management metrics other than the inventory turnover ratio.
Cost of goods sold = (Cost of beginning inventory – Previous inventory) – Cost of ending inventory
Average inventory = (Beginning inventory - Ending inventory) / 2
Ending inventory = beginning inventory + purchases - COGS
Stock to sale ratio = Average inventory / Net sales
Sell through ratio = Amount to sold items / Amount of received items
Week Cover = Amount of inventory on hand / Average amount of products sold weekly Day Cover = Amount of inventory on hand / Average amount of products sold daily Related: Excess Inventory: How to Liquidate Old and Surplus Stock in Retail How is the inventory turnover ratio calculated?There are two common ways when calculating the inventory turnover ratio. The first one uses your sales data. The First Formula:Inventory turnover = Sales / Average inventory The formula based on sales data can be misleading as the sale value also has a particular profit margin, and you may have promotions during the given time, so it can vary. It’s commonly advised to use the second method, which uses the cost of goods sold (COGS) data. The Second Formula:Inventory turnover = Cost of goods sold / Average inventory If this data is not available, you should consider using the first formula, keeping in mind the margin used for these products. As you can realize, both formulas depend on the average inventory. Average inventory is calculated by adding the beginning inventory and the ending inventory within your defined time and dividing it by two. Let’s dig in and examine some examples of inventory turnover.
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