Inventory Turnover Ratio is one important thing to keep in mind in business because it’ll tell us how frequent we are selling out and replacing our inventory.
It is necessary to deeply understand it as it can be used to analyze the performance of your business.
The higher it is, the healthier your business goes. But the lower the ratio the closer you are to getting into trouble.
Keeping your current inventory for long periods of time is a no-no, because it means your stock is getting stagnant and not being bought, therefore no revenue is coming in.
So how are you going to cover your operating costs when there’s deadstock? How will you be able to continue the circulation of your cash and invest on products that are more sellable to customers?
To be honest, NOTHING. At least without computing your inventory turnover ratio. It is what will help you analyze the efficiency of selling strategies and pricing.
Here are some additional explanation about how inventory turnover ratio can help your business:
A higher inventory turnover ratio tells us that:
Sufficient Amount of Stock will be bought – Since you will be well aware of how your current supply is doing, you can better prepare the right purchasing budget. Inventory forecasting will be more useful as well since it is based on precise data.
This means you will be able to fill up your shelves and cater the needs of your customers.
Combined with good customer service, your inventory will be sold effectively and you will receive favorable response from shoppers.
But take note, higher turnover ratio also means that there will be a window as you are reordering goods so there will be time that customers will encounter empty shelves.
This is easy to handle though, just make sure you will know when exactly you are likely to go out of stock so you can reorder right in time.
You’ll be Notified of Overstocking – Low inventory turnover ratio can mean that the number of units you have in stock is way more than the demand for it.
This just means that the inventory is not in harmony with your customers. But good thing that you have the data that you can use as basis to decide what’s in and what’s out for your customers.
Again, without the help of other marketing tactics as well as good customer service experience, your inventory turnover ratio may continue to fall even on other in-demand products.
You can compare yourself with the Competition – It’s good that you are informed about your own business, but it is also a must to study the performance of your competitors. It’s part of the game and it will help you to strive harder and do better.
After knowing what your ratio is, you can research regarding the average inventory turnover of your industry. This will give you a hunch of how your rivals are doing.
It can also give you a clue on how you can improve this ratio by trying to determine what they are doing and what causes their current ratio.