The number of times a company’s inventory is sold over the course of a month, quarter, or year is known as inventory turnover. To put it another way, inventory turnover measures how quickly a company sells its products. Slow turnover ratios usually imply weak sales and possibly an excess inventory, whereas faster turnover ratios typically suggest high sales and perhaps, an inventory shortage.
Managing inventory levels in line with consumer demand is essential for retailers, particularly those with various retail channels, in terms of profitability and operational efficiency. The inventory turnover ratio is one of the most important indicators of this. Knowing this primary measure is the key to permanently maximize a company’s resources.
No retailer wants to waste funds and resources on storage expenditures that aren’t essential. Similarly, no retailer wants to undervalue customer demand. Rather than relying on sheer guessing to determine order volumes, retailers should attempt to improve their inventory turnover rates.
In a nutshell, inventory turnover is the average of a company’s annual inventory. It indicates how many times a company’s inventory has been sold and replenished over a certain period of time. This value is significant since it allows firms to plan their financial strategies.
Importance of having a good grasp of what inventory turnover is:
- It leads to increased profitabilityof a company.
- It helps a person in making better and more informed business decisions throughout the year.