![]() On an off chance, if the items in stock do not get sold, the organization will barely have any cash available to pay its- employees, banks, bills, suppliers, lenders, and so on. Organizations often have a lot of cash tied up in their inventory. Inventory turnover is significant to a company in many ways: Mentioned below are a few benefits you might want to know before we learn how to calculate Inventory Turnover Ratio.ħ Reasons Why Inventory Turnover Ratio is Important This calculation of inventory turnover is a gateway to many possible company benefits. The Inventory Turnover Ratio is the number of times a company sells or replaces the inventory during a given period. What if you knew exactly when you needed to restock without having the fear to overstock? This is where the Inventory Turnover Ratio makes a debut. And especially if you are a small business, beware, a shortage of goods is not something you even want in your records.īut let’s think about it this way. One of the common reasons for that to occur would be a shortage of inventories. In a business, failing to keep up with the customer's demand is the biggest nightmare. Note: To find your inventory (classified as a current asset), all you need to check is your company’s Balance Sheet. You can find more about inventory management and inventory accounting. As we begin to learn about the Inventory Turnover Ratio, you will explore in detail what it has in store for you, so stay alert! It refers to the available stock of resources required in various stages of production. Inventory is the accounting of raw materials or components an organization uses to further produce goods or sell the raw materials. But before we move on, let’s understand what we mean by inventory. So, let’s learn more about Inventory Turnover Ratio and its benefits. Inventory turnover ratio is one of the most important ratios in the list of financial ratios that help you examine your financial health efficiently. The Inventory Turnover Ratio can help you track, optimize and manage resource consumption. Be it the manufacturing, selling, or restocking of goods. Moreover, when you are wheeling and dealing with a myriad of resources, it is essential to keep an account of everything. What you must also do is evaluate how often the resources are replaced. So, monitoring your company's revenue is not enough. In closing, as Supply Chain professional in general and Inventory Planners in specific we need to know our turns but the value that each successive turn will bring in terms of cash generation.Īs usual, we encourage and welcome your comments.The success of any business is marked by how efficiently and effectively the company resources are utilized. Here is a graphic version of this progression: What are the savings for each incremental turn? Again we are assuming that COGS are fixed. Management has challenged us to get to 12 turns. ![]() If we were at 11 turns currently at the same base of $50M in inventory, the cash benefit diminishes where an additional turn would generate $4.2M in cash. If we are one turn per year, increasing to two turns would generate a whopping $25M in cash. The table below shows the value of an additional turn: Current Inventory $M Let us assume you run a business with $50M in inventory. In fact, as turns increase the savings diminish. ![]() We believe that Finance and Supply Chain folks generally have the opinion that a turn accounts for a fixed or set amount of savings or cash generation. The calculation could not be any easier or after having seen it, anymore intuitive. ![]() We are assuming that the Cost of Goods Sold (COGS) on which turns are calculated remains fixed.
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