The inventory management is of paramount importance to any Australian company selling physical goods. Even if you have an e-commerce store, a physical store, or a wholesale business, excess or inadequate inventory can damage cash flow and customer satisfaction. The inventory turnover ratio is one of the best methods of measuring the efficiency of Inventory.
This measure indicates the frequency of sales and inventory replacement by a business within a given time frame. Understanding the meaning of the inventory turnover ratio, the appropriate formula for calculating it, and learning how to maximise it can help businesses reduce the cost of holding inventories, increase cash flow, and deliver products at a faster rate, particularly when combined with trusted delivery service providers such as iSend.
Key Takeaways
- The inventory turnover ratio is a metric used to calculate the efficiency of stock sales.
- An increased ratio typically indicates effective sales and inventory management.
- A low ratio can be a sign of overstocking or low demand.
- The inventory turnover ratio equation helps businesses assess performance.
- Tracking the inventory turnover ratio in days improves planning accuracy.
- Smart fulfilment and courier solutions help improve turnover efficiency
Inventory Turnover Ratio Meaning
The meaning of the inventory turnover ratio is the number of times an enterprise sells and replenishes its Inventory within a specified time frame, typically a year. It demonstrates the efficiency of the Inventory held relative to sales.
In simple terms, the inventory turnover ratio answers one of the key questions: How fast is stock moving? When turnover is high, it implies that products are selling; whereas when it is slow, you may have surplus stock or the products may not be selling as quickly.
The inventory turnover ratio is one of the key areas that need to be understood to maintain healthy inventory levels and prevent unnecessary holding costs.
Why the Inventory Turnover Ratio Is Important
Inventory turnover is a significant ratio as it has a direct relationship with cash flow, profitability, and efficiency. A lengthy inventory is a drain on capital and warehousing expenses.
Poor turnover may also slow down their deliveries and result in higher rates of returns for Australian eCommerce businesses. A high inventory turnover ratio means that all stocks are balanced, demand is accurately predicted, and fulfilment operations become easier.
It is essential to monitor this percentage to make informed decisions regarding purchasing, pricing, and business promotion.
Inventory Turnover Ratio Formula & Equation
The equation for the inventory turnover ratio is straightforward and commonly used in inventory management and accounting.
It compares the average inventory levels with the cost of the goods sold (COGS). This enables the businesses to know the efficiency of converting stock into sales.
The formula for the inventory turnover ratio is a straightforward and easy-to-understand indicator of inventory performance, and it is particularly effective when plotted over time.
Formula to Calculate Inventory Turnover Ratio
The inventory turnover ratio is calculated using the following formula:
Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory.
Where:
- The total cost of sold products is referred to as the Cost of Goods Sold
- Mean Inventory =(Opening Inventory + Closing Inventory)/2
It is a formula-based inventory turnover ratio commonly used by companies in the retail, wholesale, and e-commerce sectors.
This is because when the right formulato calculate inventory turnover ratio is used, proper comparisons can be made between the various periods.
Inventory Turnover Ratio Example
Let us examine a simple example to understand the inventory turnover ratio.
An Australian online retailer reports:
- Cost of Goods Sold: AUD 240,000
- Opening inventory: AUD 40,000
- Closing Inventory: AUD 60,000
Average inventory = (40,000 + 60,000) ÷ 2 = 50,000
Inventory turnover ratio = 240,000 ÷ 50,000 = 4.8
This implies that the business sold and turned over its stock almost five times over the year; hence, good stock movement.
What Is a Good Inventory Turnover Ratio? High & Low Inventory Turnovers
An inventory turnover ratio is reasonable based on the industry. A ratio of 4:8 is considered healthy for many Australian retailers.
A good inventory turnover indicates that there are strong sales and an adequate Level of Inventory.
The low inventory turnover could be an indication of overstocking, slow-moving company products, or price issues.
However, in cases of high turnover, it can also lead to stockouts, lost sales, and delivery delays.
Inventory Turnover Ratio in Days & Formula
The inventory turnover ratio in days shows how long Inventory stays in storage before being sold. It provides a time-based view of stock efficiency.
The days inventory turnover ratio formula is:
Inventory Turnover in Days = 365 ÷ Inventory Turnover Ratio
This calculation helps businesses understand how quickly Inventory is replenished within the system.
Inventory Stock Turnover Ratio Formula
The inventory stock turnover ratio formula focuses specifically on the efficiency of stock movement.
It uses the same base calculation but emphasises how Inventory performs as an asset. This formula is beneficial for warehouses and fulfilment-heavy businesses.
Tracking the inventory turnover ratio formula helps reduce holding costs and improve the speed of order fulfilment.
Inventory Turnover Formula Ratio vs Inventory Turnover in Days
While the inventory turnover formula ratio shows how many times Inventory is sold, the inventory turnover ratio in days shows how long stock remains unsold.
Both metrics are valuable:
- Ratio helps compare performance across periods
- Days help plan storage, deliveries, and reordering schedules
Using both together provides Australian businesses with a comprehensive view of inventory health.
Common Inventory Turnover Ratio Mistakes
The poor use or misinterpretation of the inventory turnover ratio by many businesses has often been a result of poor decision-making.
Common mistakes include:
- Using sales revenue instead of COGS
- Ignoring seasonal demand changes
- Inter-industry comparison of ratios
- Not updating inventory data regularly
- Optimising turnover at the cost of availability
These errors can be corrected to ensure meaningful results are received using the inventory turnover ratio equation.
How to Improve Inventory Turnover Ratio
To elevate your inventory turnover formula ratio, a balanced approach is needed that combines effective stock planning, sales strategy, and fulfilment efficiency. The competitive Australian market allows businesses to actively monitor demand patterns, optimise inventory movement to free up cash flow, reduce storage costs, and respond more quickly to consumer expectations.
Effective ways include:
- Proper demand forecasting
- Streamlining the stagnant products
- Using promotions to clear excess stock
- Enhancing supplier lead times
- Improving shipping and delivery
Trustworthy logistical partners are important in making stock movement more efficient.
Inventory Turnover Ratio for eCommerce Businesses
The inventory turnover ratio is particularly critical to Australian eCommerce businesses. Online buyers are demanding speedy delivery and proper Inventory.
Delayed deliveries, high storage costs, and returns may occur due to slow inventory turnover. A good inventory turnover ratio indicates that a product will be sold within a short period after it has been in the warehouse.
Quick, reliable courier systems contribute to increased turnover and enhanced consumer experiences.
How iSend Helps Improve Inventory Turnover
iSend assists Australian organisations in enhancing their inventory turnover ratio by providing quicker and more dependable deliveries nationwide.
iSend eliminates delays and limitations on fulfilment, with smart courier allocation, real-time tracking, and smooth integrations with eCommerce. Accelerated shipping will promote faster stock turnover, enabling businesses to maintain an effective inventory-to-sales ratio.
Through enhanced last-mile delivery performance, iSend directly benefits from improved inventory efficiency and customer satisfaction.
FAQs
What is a good inventory turnover formula ratio?
The normal range of good inventory turnover values is 4 to 8, depending on the industry. An increase in the ratios implies efficient stock movement, whereas very low ratios can indicate overstocking or subpar sales.
How to calculate the inventory turnover ratio formula?
The equation to calculate the inventory turnover ratio is Cost of Goods Sold divided by Average Inventory. This is computed to determine how often Inventory is used or sold, as well as how often it is replaced within a given time frame.
What is the inventory turnover ratio where the value is 1.5?
This means that the Inventory is being revolved in sales and replacement once or twice a year. It may reflect poorly on the moving stock or excess inventory.
How often should inventory turnover be calculated?
The majority of businesses compute the inventory turnover ratio quarterly, annually or monthly. Frequent monitoring helps detect trends and aids in the purchase and fulfilment process.
Conclusion
Knowledge of the formula inventory turnover ratio, its use and calculation help monitoring the inventory turnover ratio in days which is crucial for effective inventory management. These measures enable Australian businesses to maximise their cash flow, minimise holding costs, and meet customer expectations.
For an e-commerce business, proper inventory management and prompt, reliable delivery services are crucial. Companies can maximise stock turnover, improve their fulfilment performance, and achieve a high percentage ratio in the inventory turnover formula by utilising solutions like iSend.
Acquiring the skill of perfecting the art of inventory turnover is not just about figures; it is about establishing a more innovative, faster, and more profitable company.