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Inventory Management: Simple Steps to Improve Inventory Turnover
Inventory turnover is a basic formula managers use to determine the number of times a company sells through its average inventory on hand.
Basics of Inventory Turnover
Inventory turnover represents exactly how often an organization sells out its entire inventory on hand for a given period. Businesses can compute this figure on a weekly, monthly, or annual basis. Most organizations commonly desire to improve their inventory turnover as this enhances unit sales and sales revenues. Different activities or operational changes may help a business increase its inventory turnover. Past inventory data or details and existing market conditions are amongst the top elements that affect a company’s merchandise inventory turnover. A company's control team is often able to assess each item that directly or indirectly affects merchandise sales as well as inventory turnover.
Here is a common accounting formula used to compute a company's inventory turnover:
Inventory Turnover =
| Cost of Goods Sold / Average Inventory*
| |
*Average Inventory =
| Beginning Inventory + Ending Inventory / 2
| |
Data:
| ||
Cost of Goods Sold
| $75,000
| |
Beg. Inventory
| $45,000
| |
End. Inventory
| $55,000
| |
Average Inventory =
| $45,000 + $55,000 / 2
| = $50,000
|
Inventory Turnover =
| $75,000 / $50,000
| = 1.50
|
The company sells through its inventory one-and-a-half times during the current year.
|
Watch this video to learn about two formulas for calculating inventory turnover. One use net sales and the other uses inventory cost data.
Lead Time Management
Lessen the lead-time for receiving new inventory. Long lead times suggest an organization requires more days to place an inventory order and receive the merchandise at its place of business. A common method to shorten lead-time is to use an automated inventory ordering system.
Safety Stock Management
Reduce merchandise safety stock. Safety stock is excess inventory held to satisfy unforeseen consumer demand. Reduced lead-times or just-in-time inventory systems are able to assist an organization in diminishing safety stock held by the business.
Old & Obsolete Inventory
Sell off older or excess inventory at discount prices. Taking out these merchandise inventory items from current stock-on-hand can easily enhance inventory turnover and also enable for selling items with much higher demand.
Inventory Transaction Costs
Avoid additional transaction charges linked with merchandise stock replacements. For example, a company should attempt to expense freight charges right away if possible to avoid adding them to the general ledger inventory account. When possible, a company should avoid merchandise changeover costs, which can easily decrease merchandise inventory turnover.
Inventory Forecasting Notes
Produce accurate inventory forecasts. The use of historic sales reports along with a current assessment of inventory needs can reduce potential problems in ordering too much inventory based on false or inappropriate information
Notes & Reminders
Inventory accounting supplies ratios and equations for a range of merchandise ordering and management purposes. Calculating these measurements each month could aid an organization into precisely determining how well they handle existing inventory turnover.
Related
Comments
Thoughts on leveraging Corporate Trade as an alternative to discount liquidation?
- Author
I have always believed that cash is king, especially in business. Why haggle with other businesses in corporate inventory trade/barter when the company can simply lower retail prices to 10% above cost, at cost, 25% below cost, and lower if necessary to move obsolete goods?
At some point, inventory will no longer qualify for a good trade/barter deal. If a great opportunity does arise, however, I think a company should always be thinking outside the box. But in some ways, the classic business practices can work best when executed well.