What your inventory turnover ratio means for your business

Compare the turnover ratio of various categories to their sales figures and see where you could start ordering less. If sales of a particular product or category have started to drop off, you could combine ordering less of them with bringing in new products that are more in line with your best sellers. It is better for retailers to reduce their carrying costs by resisting the urge to buy in bulk, even where there are economies of scale or discounts to be had. If those products aren’t going to sell, those potential savings from the manufacturer could be meaningless. When analysing your stock turnover ratio, remember it will be relative to the stock you sell and the industry you trade in.

Extremely high inventory turnover is often easier to fix than extremely low inventory turnover. Here are a few strategies that you can use to either order more inventory or make fewer sales. Beyond clearing inventory, discounts can be an effective way to drive customer loyalty, boost word-of-mouth marketing, and help your business grow. Let’s also say that it takes you twice as long to sell through the 300 pillows as it does to sell through 300 electronics.

Turnover of 12 means that the average inventory moves through the store once a month. Once we have determined the cost of goods sold and the average inventory, we can calculate the inventory turnover ratio. We do this by dividing the cost of goods sold by the average inventory. Having a good inventory turnover ratio is about balancing supply with demand, which requires insight into customer behavior. Products with a low sell-through rate are selling slowly, and if you don’t adjust your ordering to match then you will start to accumulate stock. To move the rate up and stabilize your inventory levels, you might want to reduce your reorder quantity, decrease pricing or run promotions.

What is the average inventory turnover ratio by industry?

Too little stock means lost sales and customers left empty-handed and disappointed. It’s not a stretch to say that, for most companies, the movement of inventory through the supply chain is your business. How good your operation is at that is the strongest indicator of future success. An annual inventory turnover ratio of 4 would indicate that your stored inventory of T-shirts turns over (sells and is restocked) four times a year. This is a healthy ratio for an e-commerce business where products don’t expire and storage space is (hopefully) not too expensive. All businesses are different so you’ll have to do some research on your specific industry to compare your company to competitors.

• To maintain an ideal inventory turnover ratio in your industry, it’s crucial you’re staying stocked with the correct items.
• If you have a high inventory turnover ratio but low-profit margins, you’re likely pricing your products incorrectly.
• If you run an ecommerce business, you don’t want to sit on your beginning inventory over a period of months or years.
• Also, consider the seasonality of your products and examine the profitability of each SKU.
• If you can get your customers to preorder and register for certain products, then you have instant and confirmed sales of your stock.

Conversely, an inventory-to-sales ratio of 0.1 would mean that every 10 cents invested in inventory is generating 1 dollar of sales each year. This is a much healthier ratio and shows the business is making better use of its capital. The lower the inventory-to-sales ratio gets, the less capital the business needs to generate the same amount of sales. These kinds of businesses might have turnover ratios in the 3 to 6 range. This reflects that they will hold a relatively high amount of stock to provide a buffer against supply delays or sudden changes in demand. Usually, businesses with low gross margins need to turn their inventory more often, so they can offset their low per unit profit with higher sales volumes.

Improving Inventory Turnover with Inventory Management Software

Knowing this number can inform how you plan your purchasing, how you sell your goods and more. This doesn’t necessarily mean reducing prices across the board; lower prices don’t always increase turnover. Instead, explore the well-established pricing strategies that you may not have considered, such as premium pricing, seasonal pricing, rush delivery, cost-plus pricing, etc.

This allows you to better anticipate when to order certain items, plus compare the performance of certain product lines and categories against each other. That’s great for soap, but probably not realistic for other product categories like fine jewelry. Private jewelers only turn their inventory, on average, about .7 times per year and generally don’t carry much inventory in their stores. That’s a far departure from products like clothing, soap, and groceries. To avoid becoming the next viral TikTok video, it’s important to understand what inventory turnover ratio is and how to plan for it.

What Is a Good Inventory Turnover?

It is calculated by adding the value of inventory at the end of a period to the value of inventory at the end of the prior period and dividing the sum by 2. In order to sustain a certain level of inventory at any given moment, you need an adaptable and reliable supply chain. Work with trusted suppliers, source locally (where possible), and cultivate long-term relationships with vendors who know you and your business.

The inventory turnover ratio is a measurement shows how quickly a company sells their inventory when compared to industry averages. A low turnover rate could mean that the company has weak sales, poor marketing, or excess inventory due to overstocking. Lower turnover rates can lead to business issues such as high storage costs, products becoming obsolete and too much of your capital frozen in inventory. You need to track your ecommerce store’s orders closely to ensure that you can manage your inventory in a cost-efficient way that maximizes your business’s cash flow while meeting customer demands.

How to Improve Inventory Turnover

It also minimizes your chances of storage risk exposure like burglary, fire outbreaks, flooding, among others. Instead, use A/B tests to eliminate guesswork and offer the shopping experience your shoppers will love. You don’t have to sift through overwhelming amounts of information or scroll deeply to find what you are looking for. The company reported a 72% reduction in dock-to-stock time, 99% order accuracy, and real-time omnichannel order synchronization. Including external factors in the demand forecasting model might require special technologies and processes. Lack of in-house skills, financial constraints, slowing-moving products, or idea shortages are already enough headaches for merchants.

This can lead to a number of benefits, such as improved cash flow, higher profits, and reduced inventory costs. As someone who runs an e-commerce store, you’ll know that inventory management is one of the biggest challenges a retail business owner can face. An inventory turnover ratio is a ratio that shows how well your inventory is managed by comparing the cost of products sold with the average inventory for a period of time.

So, if your total sales are $40,000, and the average inventory value is $10,000, your turnover would be four. First, determine the total cost of goods sold (COGS) from your annual income statement. Next, calculate the average inventory value by adding together your Inventory Turnover Ratios for Ecommerce beginning inventory and ending inventory balances for a single month and dividing by two. Brightpearl users can access a centralized, 360-degree view of their entire operation, including financial statements, income statements, and—of course—inventory turnover.

On the other hand, a company that makes heavy equipment, such as airplanes, will have a much lower turnover rate. It takes a long time to manufacture and sell an airplane, but once the sale closes, it often brings in millions of dollars for the company. Depending on your brand, you may see seasonal swings in sales trends, so keep that in mind when planning your orders, and make sure that you’re adapting to your inventory based on regional needs. For instance, if you’re an apparel shop, you might need plenty of stock on heavy sweaters in your New Jersey warehouse, but lighter apparel in your Florida warehouse. High inventory turnover can indicate that you are selling your product in a timely manner, which typically means that sales are good in a given period. Ecommerce retailers should strive for a high inventory turnover rate, which means they sell the inventory they have on hand quickly and repurchase fresh inventory often.

We’ve already touched on the ideal inventory turnover ratio, and how this should normally fall between two and six. The way you manage your warehouse can have a direct effect on your inventory turnover. Even if demand is high, if your warehouse is inefficient and struggling to move goods off the shelves quickly enough, your inventory turnover ratio is going to suffer as a result. The optimum inventory turnover ratio for retailers lies between two and six. In this article, we’ll be walking you through everything you need to know about inventory turnover, including the full inventory turnover definition and the meaning of inventory turnover ratio. So, without further ado, let’s explore the concept and the benefits of better understanding it .

Tracking inventory turnover over the course of several months or years can also reveal seasonal trends or geographical pockets of demand. 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. Inventory ratio is one of the most versatile metrics a business can track. If you don’t bother calculating it, you are missing out on valuable data that you could use to optimize many of your existing operations, gain new insights, and improve your overall supply chain performance. Whether you store your products yourself or partner with a 3PL, understanding the data around your inventory and operations can help you increase efficiency, and maximize cash flow. A low inventory turnover ratio signals that sales are weak and inventory isn’t moving off the shelves.