For retailers, arguably the most important metric for business health is known as inventory turn or inventory turnover. As such, managing it closely and accurately, will help sustain operations and guarantee a turn of more than just inventory. Keeping this metric within a particular range will help ensure a business also turns a profit.
What is Inventory Turn?
Inventory turnover refers to the amount of times stock is sold out requiring a reorder or replenishment, and is typically measured within a year timeframe. From this calculation important inferences are made about the warehouse, like whether there is too much stock on hand, too little stock on hand or if a good balance of product versus orders exists. Herein lies one of the biggest challenges an inventoried retailer faces. Keeping too much stock on hand means cash flow is tied up in unsold goods, leading to a larger portion which may not sell at all. Both of these eat into the profits of a business. However, keeping too little stock on hand means missed sales opportunities while waiting for product from suppliers. As a retailer, maintaining a good balance or inventory turn is critical to success.
How to Calculate Inventory Turnover
There are a couple different ways to calculate inventory turn. One way is to simply divide sales by the inventory on hand. For example, lets say last year you sold 200k worth of products and had 100k in Inventory. Your inventory turn would be 2. In other words, you turned or sold your inventory two times during the year measured. You can also calculate inventory turn using the COGS formula. For COGS, you will need to know the cost of your inventory after it is sold to your customer. When calculating the cost of inventory be sure to factor in additional costs like marketing, returns, defects etc. to arrive at the correct figure. Then, dividing COGS by the average inventory will provide the most accurate inventory turnover. The equation looks like this: COGS/Average Inventory.
Finding the Right Balance
For most retailers having a turn of 1 means too much inventory is tying up resources and eating into profits. On the other hand 5 or higher can mean missed sales opportunities and indicate the need for a retailer to stock more product inside the warehouse. Keeping an inventory turn at or between 2-4, for most, will maintain an ideal balance. Doing so may also bring additional benefits. Maintaining an inventory turn above 1 allows many retailers to sell their inventory prior to paying the supplier for it. Having more cash flow on hand allows a business increased flexibility and a greater opportunity for success.
Using Inventory Management Software to Track Turnover
Tracking this metric can easily be done using inventory management software either thru reporting features or thru the systems own built in tracking feature. It may be tracked per item or per warehouse depending. Check with your inventory management service provider to find out how you can easily track this metric from within your own system. In Zenventory, inventory turnover is tracked per item using a widget. By simply adding the widget to the dashboard these calculations are handled and tracked by the system automatically. Visit Zenventory to schedule a live demo with one of our software specialists. Uncover the plethora of reporting features that provide you with enhanced insight into the details of your warehouse operation. With Zenventory, you get all the data you need to run a successful warehouse.
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