Analyze Inventory Levels: Analyzing inventory levels is the first step in optimizing inventory turnover. There are a number of ways you can approach improving inventory turnover, and what will work for your business depends on lots of different factors. Inventory Turnover Optimization Techniques Inventory management software, or enterprise resource planning (ERP) software, can often be helpful in tracking inventory at a very detailed level. There may be a number of factors that can affect the ITR at any given point in time so you’ll want to take these into account: Points To Consider When Looking At Your Business’ Inventory Ratio If you’re looking for free resources, you may want to check with your local library or Small Business Development Center to learn about market data that may be available for free or low cost. Industry benchmarks may also be available (for a fee) from research sources like ReadyRatios or CSIMarket. Your industry association may have information about industry average turnover ratios. What is a good inventory turnover ratio for your business and industry may be completely different from that of another.Ī grocery store will have a higher inventory turnover rate than a business selling specialty packaged (non-perishable) gourmet foods, for example. Understanding how your business stacks up against others in your industry may be helpful to understand your business performance. Find Out Your Industry Average Inventory Turnover Ratio In general, a higher ITR means the business is turning over inventory more quickly (and likely paying less to store inventory as well). Once these figures have been determined, the inventory turnover ratio can be calculated by dividing the cost of goods sold by the average inventory value. (For example, if you are calculating ITR for a quarter you can average 3 months of inventory ending value and divide by three.) The average inventory value is calculated by taking the average of the beginning and ending inventory. Your cost of goods sold (COGS) over that time period can be found on your financial statements, specifically the income statement, which should be available from your business bookkeeping software, or your accounting staff or professional. Then you’ll calculate the ITR by dividing the cost of goods sold by the average inventory value. You will need to choose a time frame to measure the ITR, such as a month, quarter, or year since you’ll use the inventory turnover formula to calculate your ITR over a specific period of time. ITR = cost of goods sold divided by average inventory cost The basic inventory turnover ratio formula is: How To Calculate Inventory Turnover Ratio (ITR)? Understanding what’s not selling can help you understand whether you need to adjust pricing by offering discounts or even dispose of dead stock. Storage costs on unsold inventory add up, and will reduce your profit margin. Inventory purchases cost money, and if you sell items too slowly, you aren’t turning that inventory into revenue any time soon.
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