How to Improve Your Inventory Turnover Ratio

stock turnover ratio

Under the JIT (or “Just in Time”) method of inventory management, a merchant has just enough stock to meet demand, but only just; once demand is met, the merchant will need to replenish their stock levels quickly. This approach to inventory management and replenishment can be risky, but it can help lower your inventory turnover. If you find yourself replenishing a certain SKU over and over again in a certain time period, try increasing the number of units you order to bolster SKU levels. Just be sure to recalculate your reorder point and safety stock levels to make sure that your inventory levels stay optimized. Pre-orders can be a beneficial tool for businesses looking to gauge demand, generate excitement, and raise funds.

With increases in online shopping and demand for click-and-collect, retailers and wholesalers are doing everything from shifting their sales-channel focus to fundamentally changing how they do business. Despite popular opinion, the cheapest suppliers aren’t always the best choice. If you’re struggling to meet market demand, you may want to opt for the most efficient supplier, to ensure you’re keeping your most popular products in stock. These companies should get products off the shelves quickly — unlike high-profit margin companies that can afford to make fewer sales due to selling more expensive products.

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The longer an inventory item remains in stock, the higher its holding cost, and the lower the likelihood that customers will return to shop. Only Shopify POS helps you manage warehouse and retail store inventory from the same back office. Shopify automatically syncs stock quantities as you receive, sell, return, or exchange products online or in store—no manual reconciling necessary. There are also quantity discount bundles to consider if you’re selling bundles of the same product. Think of three-for-two deals in which customers receive more for their money.

How has inventory turnover rates changed over the last few years?

The easiest way to implement the techniques is through the use of inventory management software. For example, each square meter you use to store inventory has a cost as a percentage of the rent you pay to house it. Inefficient manufacturing and shipping practices increase your COGS, which eats into your profits. It’s up to you to determine if your inventory turnover is adequate for your business.

stock turnover ratio

Pre-orders can also help inventory move through the supply chain at a steadier pace, which can improve inventory turnover. There is no right or wrong turnover rate — but optimizing your product line, replenishment strategy, and even warehouse can help your bottom line. Just as key irs forms and tax publications for 2021 calculating your inventory turnover ratio helps prevent you from amassing too much inventory, it can also help prevent you from ordering too little. However, doing so may lead you to invest in products that are very slow to sell — or worse yet, that won’t sell at all anymore.

Why is calculating inventory turnover ratio important?

While this may seem low, remember that perfume is a luxury good, and retailers in this space can afford a lower turnover ratio. In the next section, we’ll explore how your industry affects your ideal inventory turnover ratio. A high inventory turnover ratio, on the other hand, suggests strong sales. As problems go, ensuring a company has sufficient inventory to support strong sales is a better one to have than needing to scale down inventory because business is lagging.

SKU rationalization is the process of identifying whether a product on the SKU level should be discontinued due to declining sales and overall profitability. Every warehouse needs each SKU to be stored separately and not mixed to reduce the chance of a mis-pick, and the efficient use of space is very important when it comes to storage. So, let’s say your sales for the year totaled $500,000, and your average inventory value on any given day was $100,000. Order management systems, including Extensiv, equip brands to develop and offer the right product bundles at the right price to increase both turnover and profit.

With inventory reporting, trend-analysis, and real-time visibility into inventory levels, you can improve demand forecasting and get more control over the key metrics that drive business growth. On the other hand, a low inventory turnover ratio means your products aren’t selling or you’re carrying too much inventory at one time, which can be expensive. In addition, a slow turnover can indicate a change in consumer behavior, such as a decrease in market demand. You may consider updating your pricing to reflect new consumer behaviors if this is true.

  • Therefore, it’s crucial to keep a balance between your purchasing level and your sales performance to optimize your inventory management.
  • A high inventory turnover rate suggests optimal performance, while lower turnover means inefficiency.
  • Some computer programs measure the stock turns of an item using the actual number sold.
  • In this case, our inventory turnover rate gives you a glimpse into how much carrying cost you’re shouldering that you might not have to.
  • If you’re already applying all of the other tips in this list and you’re still not making sales, your pricing could be too high.

While you shouldn’t base decisions solely on it, a high inventory turnover is generally positive and means you have good inventory control, while a low ratio typically indicates the opposite. Inventory turnover is how fast (or how many times) you can sell through your inventory during a specific timeframe. A high turnover rate often means you’re selling your goods quickly and efficiently. A low turnover rate can indicate that sales are slow or that you’ve overstocked.

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Rationalize SKUs on pace with cash flow, margin, lead time, and MOQ, and be sensible to what a customer really needs. One pallet holds all 300 electronics, but you’d need 11 extra pallets to house the 275 remaining units of pillows. When you know how fast items turn over, you can make sure to order popular items well in advance and in sufficient quantities to meet customer demand. This prevents stockouts, which results in fewer backorders and more happy customers. Stocking up on popular, must-have products can help you sell faster to your target audience.

  • If you have a high inventory turnover ratio but low-profit margins, you’re likely pricing your products incorrectly.
  • In some cases, it is caused by an insufficient inventory, potentially leading to lost sales if the product is sold out.
  • If XYZ Company is a bookstore, this number would indicate that it has poor inventory control, which means the purchasing department is not in sync with the sales department.
  • Increasing prices may lose some customers but improve overall profitability.

In most cases, leftover inventory can cost you money because it takes up space. To find your ITR for the year, divide your total cost of goods sold by your average inventory value. You can determine the average inventory value by adding together the beginning inventory and ending inventory balances for a single month, and dividing by two. If you’re continually restocking inventory right as you’re running out of it, your inventory levels could get dangerously low. The slightest hitch in your supply chain can lead to a shortage, which means you might not be able to meet customer demand.

How can I improve inventory turnover for my business?

This results in obsolete inventory or dead stock that increases holding costs, and costs time and money to move out. If you’ve never calculated your inventory turnover ratio, we’ve put together a sample calculation to get you started. Ultimately, your inventory turnover ratio can give you insight into your business. Additionally, your inventory affects the growth of your business, so you should know your turnover ratio and brainstorm ways to improve it.

stock turnover ratio

The information for this equation is available on the income statement (COGS) and the balance sheet (average inventory). In the most general sense, the more sales your business makes, the more successful your business probably is. Because the inventory turnover ratio speaks to how quickly a business is selling through its inventory, some businesses use it to check the pulse of sales performance.

That means 9.29 times out of the year, your inventory completely turned over. For example, a fashion boutique sold $600,000 in products for a year, and they held $200,000 of inventory on average. This indicates that their inventory had to be replenished 3 times in the year, which is a quite profitable rate. Just in time (JIT) is an inventory management method where goods are ordered, stored, assembled, and/or manufactured to fulfill orders at the last possible moment. The goal of the JIT method is to get orders to customers quickly while minimizing product holding costs.

Indeed, sales in volume are considered as less sensitive because selling prices are already public anyway. Yet, the two companies have roughly the same working capital requirements as far as their inventories are concerned. Thus, while inventory rotations do not equate profitability levels, they are correlated to a large extent. For slow-selling products that occupy a large space in your inventory, try different solutions to move out the old stock quickly.

How to improve inventory turnover with Katana’s inventory management software

Knowledge of consumers’ buying habits makes it much easier to forecast demand accurately, and helps you optimize your inventory levels throughout the year and across locations. The clock begins as soon you start producing a product or purchasing it from a supplier, and the longer you own the product without selling it to a customer, the more money you lose. Streamlining your supply chain to get products into your inventory faster means selling them more quickly.