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Inventory turnover In accounting , the Inventory turnover is a
measure of the number of times inventory is sold or used in a
time
period such as a year. The equation for inventory turnover
equals the cost of goods sold divided by the
average inventory . Inventory turnover is also known as
inventory turns , stockturn , stock turns , turns ,and stock
turnover .
Application in Business
A low turnover rate may point to overstocking [2], obsolescence,
or deficiencies in the product line
or marketing effort. However, in some instances a low rate may
be appropriate, such as where
higher inventory levels occur in anticipation of rapidly rising
prices or shortages.
Conversely a high turnover rate may indicate inadequate
inventory levels, which may lead to a
loss in business as the inventory is too low. This often can
result in stock shortages.
Some compilers of industry data (e.g., Dun & Bradstreet )
use sales as the numerator instead of
cost of sales. Cost of sales yields a more realistic turnover
ratio, but it is often necessary to use
sales for purposes of comparative analysis. Cost of sales is
considered to be more realistic
because of the difference in which sales and the cost of sales
are recorded. Sales are generally
recorded at market value, i.e. the value at which the
marketplace paid for the good or service
provided by the firm. In the event that the firm had an
exceptional year and the market paid a
premium for the firm's goods and services then the numerator may
be an inaccurate measure.
However, cost of sales is recorded by the firm at what the firm
actually paid for the materials
available for sale. Additionally, firms may reduce prices to
generate sales in an effort to cycle
inventory. In this article, the terms "cost of sales" and "cost
of goods sold" are synonymous.
An item whose inventory is sold (turns over) once a year has
higher holding cost than one that
turns over twice, or three times, or more in that time.Stock
turnover also indicates the briskness of
the business. The purpose of increasing inventory turns is to
reduce inventory for three reasons.
Increasing inventory turns reduces holding cost . The
organization spends less money
on rent, utilities, insurance, theft and other costs of
maintaining a stock of good to be sold.
Reducing holding cost increases net income and profitability as
long as
the revenue from selling the item remains constant.
Items that turn over more quickly increase responsiveness to
changes in customer
requirements while allowing the replacement of obsolete items.
This is a major concern in
fashion industries.
http://en.wikipedia.org/wiki/Accountancyhttp://en.wikipedia.org/wiki/Accountancyhttp://en.wikipedia.org/wiki/Accountancyhttp://en.wikipedia.org/wiki/Equationhttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Inventory_turns#cite_note-1http://en.wikipedia.org/wiki/Dun_%26_Bradstreethttp://en.wikipedia.org/wiki/Dun_%26_Bradstreethttp://en.wikipedia.org/wiki/Cost_of_saleshttp://en.wikipedia.org/wiki/Holding_costhttp://en.wikipedia.org/wiki/Holding_costhttp://en.wikipedia.org/wiki/Holding_costhttp://en.wikipedia.org/wiki/Holding_costhttp://en.wikipedia.org/wiki/Net_incomehttp://en.wikipedia.org/wiki/Net_incomehttp://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Equationhttp://en.wikipedia.org/wiki/Inventoryhttp://en.wikipedia.org/wiki/Inventory_turns#cite_note-1http://en.wikipedia.org/wiki/Dun_%26_Bradstreethttp://en.wikipedia.org/wiki/Cost_of_saleshttp://en.wikipedia.org/wiki/Holding_costhttp://en.wikipedia.org/wiki/Holding_costhttp://en.wikipedia.org/wiki/Net_incomehttp://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Accountancy
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When making comparison between firms, it's important to take
note of the industry, or
the comparison will be distorted. Making comparison between a
supermarket and a car
dealer, will not be appropriate, as supermarket sells fast
moving goods such as sweets,chocolates, soft drinks so the stock
turnover will be higher. However, a car dealer will have a
low turnover due to the item being a slow moving item. As such
only intra-industry
comparison will be appropriate.
Some computer programs measure the stock turns of an item using
the actual number sold.
inventory cost
Definition
Costs associated with the maintenance of inventory . Inventory
cost may
include shrinkage , insurance , storage fees , taxes , and
depreciation , and is typically
estimated as a percentage of the total value of the
inventory.
A business must balance inventory cost against the risk of not
being able to
fulfill customer requests in a timely manner.
The 6 big inventory risks and how to mitigate them
How to forecast more accurately whether your business is stable,
growing, declining, or subject to
seasonality
How to set up the inventory replenishment cycle, including
setting safety stock levels, reorder points,
and economic order quantities (EOQ)
How to measure inventory management performance using metrics
such as inventory turnover, fill rate,
and various financial ratios
How to integrate desired service levels into inventory
management and control decisions
How to conduct inventory analysis, including applying ABC
Analysis/Stratification
How to reduce inventory
How to calculate cost savings related to inventory management
and control decisions
How to evaluate the effect of lead time, including
transportation considerations, on inventory
What postponement is and how you might apply it for reducing
inventory and waste
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