Inventory turnover: what it is and how to calculate it!

Inventory turnover is an indicator that is of great importance not only for the warehousing and logistics department, but also for the finance department.

It should be applied to any company in any segment that works with the need to have stocks, be it raw materials or even finished products.

One of its major objectives is to ensure greater efficiency for the organization, avoiding product idleness, and ensuring that everything that is being produced and purchased is actually sold.

In this article, we’ll go into more depth about what this indicator is, how it’s calculated, and provide some tips for you to manage stock efficiently. Good reading!

What is Inventory Turnover?

Inventory turnover is an indicator that measures how many times the goods produced and stored were sold and replaced in a given period. Therefore, the higher this indicator is, the more efficient a company’s production and sales are.

In this sense, the ideal scenario that should be pursued by any organization is that the stock does not have excess goods, and for this reason has a high turnover, that is, an even higher turnover.

By measuring this indicator, the company can assess whether it is experiencing an increase or decrease in inventory turnover and then adopt strategies such as exchanging goods, reducing prices and even production capacity to change the scenario.

How to calculate inventory turnover?

Calculating inventory turnover is very simple and consists of dividing a company’s total sales by the average inventory volume. The result will be how many times that stock turned over the period. The formula for its calculation is:

  • Inventory turnover = total sales / average inventory volume.

To make it easier let’s exemplify. Imagine a supermarket that has a total of 1,000 cans of chocolate milk in its stock. Consider that during the period of 1 month, 2 thousand cans of the product were sold. Inventory turnover will be:

  • Inventory turnover = 2,000 / 1,000 = 2

This means that the stock has turned twice during the monthly period. When the organization has many product types, it can use the purchase amount to make this calculation.

Calculating inventory by purchase price

In the case of the purchase price, the company can add all the cost of the inventory and sales in the period, considering its cost price to find the indicator.

Remembering that, even if monetary values ​​are used in this case instead of units, the result will always be in number of spins. Let’s go to the example.

Consider that the supermarket in question has a total inventory of R$10,000 and that its annual sales volume is R$30,000. So, the inventory turnover will be:

  • Inventory Turnover = 30 thousand / 10 thousand = 3

In this example, the stock turned 3 times during the year. To know if the value is good or bad, you need to compare it with the leading companies in your segment.

Average storage time

Through the inventory turnover, it is possible to find out the average time that the goods are stopped inside the company, for this it is enough to apply the formula:

  • Average storage time = period days / number of turns

Imagine that in this calculation we want to know what is the average storage time of the example above during the year, that is, 365 days. We saw that there were 3 inventory turns in the period. So the storage time is:

  • Storage time = 365 / 3 = 121.67 days

Approximating this value, we conclude that the average time for stock replenishment is 122 days. With these numbers in hand, it is easier to adopt strategies to control stock.

Although there is no ideal stock turnover value, it is always good to compare the indicator with the main players in the market to assess its efficiency.

4 tips for managing inventory turnover

Now that we’ve already shown what inventory turnover is , and how important it is to ensure more financial and logistical efficiency for your business, we’ll show you 4 tips below for you to manage your inventory efficiently.

1. Track individual sales

If you choose to calculate using the purchase value of the spin to follow the index, it is possible not to have an exact notion of what is happening.

For example, imagine that you sell 10 types of products, but 2 of them are taking longer to sell. Soon, the indicator will start to deteriorate, that is, there will be less stock turnover in a period.

Therefore, in order to make an accurate decision, it is necessary to monitor product sales to find out which ones are performing the worst and consequently impacting inventory turnover.

2. Take stock inventory

The best way to understand what is making your stock turn slower is to take inventory to find out what items you have in stock.

When you have an efficient inventory, you can even create a product-by-product inventory turnover rate and thus expand your business strategy.

In this case, you can observe a product that is selling poorly, and then take advantage of it and promote it to improve inventory turnover and then invest the money in other products with higher turnover.

3. Increase turnover

Increasing turnover is essential to have a better performance of your stock. To do this, you need to know which items are selling slower.

By directly attacking the items that are slowing down your turnover, you can improve your business’ working capital needs and increase purchasing and production efficiency.

Therefore, one of the main objectives regarding inventory turnover is to try to increase its turnover as much as possible, knowing in depth the items that are negatively impacting the index.

4. Automate inventory management

Finally, automating inventory turns is crucial for you to improve your business performance. Try to imagine a stock that has 3 thousand types of products. Doing all the manual management is quite complicated.

In this case, it is crucial to have an ERP system that integrates the inventory with the financial department, while issuing the invoice and calculating the payment of taxes.

All of this brings more efficiency to the company, as well as better monitoring of inventory performance. And if you are looking for software to automate the issuance of invoices for your business, visit our website and learn about our solution.