November 2, 2022

What is an Inventory Turnover Ratio?

What is the Inventory Turnover Ratio? Why is it important?

The inventory turnover ratio is a measure of how fast you are “turning”, or selling/using, your inventory within a given time frame. So, how is it calculated?

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Why is the Inventory Turnover Ratio important?

Less inventory means more working capital available for strategic investments. For instance, having working capital on hand allows you to invest in SKUs driving profitability, R&D efforts to test new products, and marketing opportunities. If those investments are successful, you will increase your sales and profit: essentially creating a flywheel effect for your business.

So, to lower your inventory and increase working capital flexibility, you need to have efficient inventory management.

This is where the Inventory Turnover Ratio comes in. This metric can be tracked at each step of your supply chain chain: from the raw materials at the factory in Mexico, to the warehouse in Ohio, to the truck that picks up the inventory from Ohio and brings it to New York, and the distribution center in Queens, NY. 

Whether it is stocked items or goods in transit, it is possible to measure the corresponding inventory turnover ratio at the individual SKU level.

Want to know how you can improve your Inventory Turnover Ratio?

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