What Is Inventory Turnover?

If you are in the business world, it is expected, fitting, and proper that you know even just the basics with regard to inventories as these are the items that will keep your business going. This is something that you offer to your customers so you will acquire profit and can improve your system and operation. When we say inventory and profit, this would lead us to the discussion of inventory turnover.You may also see free inventory.

What then is an inventory turnover and how will it affect your profitability? This article will discuss about the important things that you must know with regard to inventory turnover and how it is interpreted and other necessary information about inventory turnover.You may also see store inventory.

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What Is Inventory?

Before anything else, you must at least get a grip of the basics of an inventory. An inventory is an account in the Statement of Financial Position (balance sheet) and Statement of Comprehensive Income (income statement) which includes the stocks of an entity which can be classified as raw materials, work in process, and finished goods that is readily available for sale.You may also see school inventory.

What Is Inventory Turnover and How Is It Interpreted?

It is stated above that inventory turnover has something to do with sales and, ultimately, the profit of a certain entity. Inventory turnover, also known as inventory turns, merchandise turnover, stock turns, turns, or stock turnover, pertains to the number of times a company sells and replaces its stock of goods during a period. This provides insight as to how the company manages costs as well as the effectiveness of their sales efforts.You may also see application inventory.

Simply stated, an inventory turnover is a measure of the number of times an inventory is sold or used in a time period such as a year. The inventory turnover is calculated to check whether the entity has an excessive inventory in comparison to its level of sales.You may also see assets inventory.

How then should an inventory turnover be interpreted? Here are some basic principles that you must know.

1. The higher the inventory turnover, the better. This is because higher turnover means that an entity is selling their goods very quickly and that there is a strong demand for their goods.You may also see accounting inventory.

2. Low inventory turnover, on the other hand, would indicate weaker sales and declining demand for a company’s products and is something that an entity must be worried about.

3. Inventory turnover provides insight as to whether a certain entity is managing its inventories properly for they might have overestimated the demand for their products and purchased or produced too many goods or, conversely, they might not be buying or producing enough inventory that they fail to meet the demands of their customers and may be missing out on sales opportunities.You may also see landlord inventory.

4. Inventory turnover shows whether a company’s sales and purchasing departments are in sync for these are the two departments that must coordinate in terms of sales and purchase of inventories. It is ideal that the inventory should match sales. The holding cost for the inventories that are not selling may increase resulting to an increase in the expenses if there is too much items being purchased by the purchasing department.You may also see system inventory.

Inventory Turnover Ratio

When we are talking about inventory turnover, we must also not miss on the inventory turnover ratio which is also a significant factor in the analysis of the financial information of an entity.You may also see food inventory.

An inventory turnover ratio is an efficiency ratio showing how effectively inventory is managed through the comparison of the cost of goods sold and the average inventory for a period. This also measures the number of times average inventory is “turned” or sold during a period. Simply stated, it measures how many times a company sold its total average inventory amount during the year. For example, an entity with an average inventory of $1,000 and sales of $10,000 effectively sold its inventories 10 times over.You may also see process inventory.

Why is this ratio important? It is important because it depends on two main components of performance stock purchasing and sales. For stock purchasing, if larger amounts of inventory are purchased during the year, the entity must be able to sell greater amounts of inventory for their turnover to be improved. Otherwise, when the greater amounts of inventory are not sold, storage costs and other holding costs will be incurred, which are additions to the expenses. For the sales component, the sales of an entity must match the inventory purchases. Otherwise, the inventory will not turn effectively. Hence, this is the reason why the purchasing and sales departments must be in tune and effectively coordinate with each other.You may also see blank inventory.

Formula

To solve for the inventory turnover ratio, you must divide the cost of goods sold for a period by the average inventory for that period. The average inventory is computed as the beginning inventory plus the ending inventory divided by two.

The average inventory is used instead of ending inventory, which was previously used as the basis for the computation because there are a lot of companies whose inventory fluctuates greatly throughout the year. The cost of goods sold is reported on the income statement.

Analysis

As an analysis, an inventory turnover is a measure of how efficiently a company can control its merchandise. As stated above, the higher the turnover, the better the performance of the entity as regards their sales. This means that the company does not buy too much inventory and wastes resources. Furthermore, it also shows that the company can effectively sell the inventory it buys. It is also a measurement showing the investors the liquidity of the company.You may also see skills inventory.

Last Say

Inventory turnover is important in every business establishment since this will determine how well the company is doing with regard to their inventories. This pertains to the number of times the inventory is being sold. This would also determine if the purchasing and selling department are in tune with each other.You may also see property inventory.

Hence, you must know how to compute an inventory turnover which is simply cost of goods sold for the period divided by the average inventory for the period.You may also see moving inventory.

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