Thursday, August 6

Inventory Turnover Ratio

The inventory turnover ratio is a performance ratio that shows how efficiently stock is handled by comparing the price of products sold with typical stock for a time. This measures the amount of times typical stock is “turned” or market during a period. To put it differently, it measures how often each business sold its complete average stock dollar amount throughout the entire year. An organization using $1,000 of ordinary stock and earnings of $10,000 efficiently marketed its 10 days over.

This ratio is critical because overall turnover is dependent on two major elements of functionality. The before all else part is asset buying. If larger quantities of stock are bought during the calendar year, the business is going to need to sell higher quantities of inventory to enhance its turnover. In the event the corporation may sell these greater amounts of inventory, it will incur storage costs and other holding costs.

The second component is the sales. Sales have to match inventory purchases otherwise the inventory will not turn effectively. That’s why the buying and sales departments must be in tune with each other.

Formula

The inventory turnover ratio is calculated by dividing the cost of goods sold for a period by the average inventory for that period.

Inventory Turns