Inventory Turnover – what is it?
Inventory Turnover is a financial indicator that measures how often a company sells and renews its inventory over a given period of time. This indicator is crucial in inventory management because it helps determine how effectively a company manages its inventory and how quickly it converts inventory into revenue. A high inventory turnover means that a company manages its inventory efficiently and sells products quickly, while a low turnover may suggest problems with excess inventory, resulting in additional storage costs.
Inventory Turnover is calculated by dividing Cost of Goods Sold (COGS) by the average value of inventory over a given period. For example, if a company has a cost of goods sold of PLN 500,000 and the average inventory value is PLN 100,000, the inventory turnover rate is 5, which means that the company renews its inventory five times a year. High turnover is desirable, especially in industries where products have a short shelf life or are susceptible to rapid changes in consumer preferences.
Inventory turnover is important because it directly affects a company’s profitability. Inventory that is too high can entail additional storage costs, the risk of out-of-date products and the freezing of capital that could be better used in other areas. On the other hand, turnover that is too fast can suggest that the company is unable to meet demand, which can lead to lost sales and dissatisfied customers.
Frequently asked questions
1. What is Inventory Turnover?
Inventory Turnover is a financial indicator that measures how often a company renews its inventory over a given period of time. It indicates how effectively a company manages its inventory and how quickly it converts inventory into revenue.
2. How to calculate the Inventory Turnover ratio?
The Inventory Turnover ratio is calculated by dividing the Cost of Goods Sold (COGS) by the average value of inventory in a given period. For example, if COGS is PLN 500,000 and the average value of inventory is PLN 100,000, the inventory turnover is 5.
3. Why is Inventory Turnover important for companies?
The Inventory Turnover indicator is important because it helps companies understand how effectively they manage their inventory, which has a direct impact on operating costs, profitability and the ability to respond quickly to changes in demand.
4. What does high and low inventory turnover mean?
High inventory turnover means that a company is selling its products quickly, which is usually desirable. Low turnover can indicate problems with excess inventory, which is associated with higher storage costs and the risk of out-of-date inventory.
