However, do well to combine it with other indicators for maximum business growth. What products do you need to put on sale?Ĭonsequently, you can purchase merchandise, and sell products that your customers want.What and how many items do you have to order.With the inventory turnover ratio, you can answer questions such as: It shows the stock level and turnover rates which makes making business decisions an easy task. While there are many indicators that you can use, the inventory turnover ratio is particularly peculiar to retail businesses. Making decisions that will benefit your business can be challenging as a business owner. This will be highly beneficial when making a loan application. It can show liquidityĭo you intend to get a loan to manage your retail business? If yes, you should always calculate the inventory turnover ratio as it will how your business assets liquidity. Being a key performance indicator, the inventory turnover ratio can help you manage and grow your business effectively. This is one of the most valuable importance of calculating the inventory turnover ratio in retail businesses. Inventory turnover ratio is a key performance indicator Below are different reasons why you should calculate the inventory turnover ratio. Not calculating your business inventory turnover ratio can result in you missing valuable data that can help you enact your business plan effectively and achieve your goals. Learn more Why It’s Important to Measure the Inventory Turnover Ratio Setup your online store in minutes, and start selling anywhere Having an inventory turnover ratio of 2 to 4 will help your business perform well and help you achieve your goals without getting overwhelmed along the way. Also, in terms of logistics, this might mean you are worrying more about getting your products than selling them. Consequently, you might be missing out on sales because you are out of certain stock or aren’t holding enough supply to keep up with demand. For example, if you have a value of 7, it can indicate a low stock level. What about an inventory turnover ratio above 4? What does a high number say about your retail business?Ĭontrary to what you might think, an extremely high value is not a good thing for retail businesses. Why not a higher inventory turnover ratio? Therefore, you should scrap having an inventory turnover ratio below 2. This is something that will affect your retail business.Īs a retail business, you undoubtedly want to make tremendous sales and not only remain relevant.
It also means that you are also spending a large proportion of your budget on keeping/storing your stocks. This can be due to a decrease in the popularity of products, a weak marketing force, etc. Why not a lower inventory turnover ratio?Ī lower inventory turnover ratio than 2 shows might signal a decline in sales. As a retail business owner, an inventory turnover ratio your business should aim for is between 2 to 4. However, what is the direct application of this formula to your retail business? What inventory turnover should you aim for as a retail business owner. You already have an idea of the inventory turnover ratio.
What is a Good Inventory Turnover Ratio for Retail Businesses? They have money tied up in stock, and they are undoubtedly spending more to store them than they are making in revenue from selling. What to Note: From the answer obtained, you might say that the retail business is holding and spending on too much inventory.
On average they held £500,000 in inventory.
To further understand how to use this formula and the effect inventory turnover ratio has, below are two examples to help you understand how this number might work in the real world.Ī hair retail business sold £200,000 worth of hair in 2019. Inventory Turnover Ratio = Amount in Sales of Products Generated/Average Inventory How do you calculate your inventory turnover ratio?įor any business, there is a simple formula you can use to get your inventory turnover ratio. Therefore, armed with this number, you have a clear picture of your general financial position. In retail businesses, this ratio is an important parameter that gives you the lowdown on the speed at which you sell your overall products. However, many businesses also calculate it monthly or quarterly. Normally you calculate the inventory turnover ratio in terms of years. Inventory turnover is a term that shows business owners the number of times they sell their products over time.
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