![]() ![]() It could be due to overstocking cases or just a fall in demand for their products by consumers.ĭifferent industries have different inventory turnover ratios. On the other hand, businesses with a low inventory turnover ratio (when compared to other companies in the same industry) indicate inefficiencies in the management of their inventories. Higher inventory turnover is a good thing for any company as it indicates how efficient it is in the production as well as management of its inventories. What the ratio does is show that the company does not overspend by buying too much inventory which, in turn, wastes resources because you have to store the non-saleable inventory.įailure to do this is an indicator that profitability is being affected by inventory costs, and shows that the business is not efficient at selling the inventory it purchases. If a business purchases a large inventory of stock at the beginning of the year, this would imply that it has to sell it over the year if it wants to improve its inventory turnover ratio. ![]() Inventory Turnover AnalysisĪ business needs to know its inventory turnover because this measures how efficiently the company controls its merchandise. On December, the available inventory would not be a true reflection of its stock.Ĭost of goods sold is the direct production cost and can be found on the company income statement. Let’s say the bread manufacturing company purchased a large inventory on January 1st and used part of it for bread manufacturing, purchasing additional inventories to be used in the production process throughout the year. The average gives a true reflection of stock purchased and sold within a particular time period. Why is the average inventory used instead of ending inventory? We use the average inventory to take into account the fluctuation of stock over the year. To calculate the inventory turnover for a business or company over a particular period, you divide the cost of goods sold (COGS) by the average inventory. So what is business inventory? Inventory or stock of a business takes into account the finished goods ready for resale, the raw materials used in the production of the finished goods, and the goods that are still a work in progress.įor example, a bread manufacturing company's inventory will be the final bread ready for sale, raw material used to produce the bread, and the bread still in the manufacturing process. Put simply, the ratio measures the number of times a company sold its total average inventory dollar amount during the year. Inventory turnover is an efficiency ratio that shows how many times a company sells and replaces inventory in a given time period. ![]()
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