![]() You can determine the inventory turnover ratio for a product with this calculation:Ĭost of goods sold for 12 months ÷average inventory value during the same 12 monthsĬost of goods sold – It’s your cost to produce your sold product-not the selling price. Learn more about inventory turnover and what it can tell you about your business. Businesses should aim to achieve an inventory turnover ratio that is consistent with their industry benchmarks and that does not compromise sales or profitability. For example, retailers typically have higher inventory turnover ratios than manufacturers, as they sell their products directly to consumers. In general, a healthy inventory turnover ratio varies depending on the industry. Additionally, a high inventory turnover ratio can be a sign that a business is not pricing its products high enough, which can eat into profits. An inventory turnover ratio that is too high can signal that a business is not carrying enough inventory to meet demand, which can lead to stockouts. However, there can be too much of a good thing. ![]() Start a Free Trial Is a high turnover ratio good?Ī high inventory turnover ratio is generally considered a good thing for businesses, as it indicates that they are efficiently selling their products and generating revenue. A high volume of sales can lead to overstocking products that will expire, go out of style, or lose their warranty.Īre you ready to transform how your business does inventory?.If you’re losing money on a product-even if it sells well-a high ratio isn’t healthy. Every high ratio does not mean you’re making a profit on sales.Sometimes, continuously high ratios for an item lead to frequent shortages and cause your clients or customers to find another source.And there are disadvantages to a higher-than-average inventory turnover ratio. High – A high ratio means that an item sells well, but it could also indicate that there’s not enough of it in stock. Delays in replacing old items with newer ones that might sell better.Low – If a product or service has a low inventory turnover ratio, it’s selling slowly. ![]() It represents your company’s ability to sell items without stockpiling them. Inventory turnover ratio is a calculation that shows how many times a product or service was sold and replaced within a given timeframe. But what ratio do you need to keep your business healthy? What Is Inventory Turnover Ratio? Without good turnover, you can’t pay lenders, employees, or suppliers, and overhead costs could go through the roof. Whether your business is large or small, you need a good inventory turnover ratio for your business to thrive.
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