Benefits of Inventory Turnover Ratio and How to Increase Inventory Turnover

The inventory turnover ratio (ITR) is one of the most effective, yet underrated, metrics for determining the health of a business. It gives a vivid picture about your inventory management.

Undeniably, this is paramount for your retail operations. Inventory Management signifies constructive management of stocks, the frequency of your product movement and helps you stay ahead of competitors.

Keep reading till the end of this blog to learn the necessity of ITR in your organisation and its impact.

What is inventory turnover ratio?

ITR is a measure of inventory sold during a given period. It governs your inventory management efficiency. This calculation does not consider the cost of sales per unit.

According to International Journal of Management and Applied Science, ITR is calculated by dividing the cost of inventory sold during a given period, by the average inventory for that duration.

The formula for calculating inventory turnover

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Here are some things to keep in mind while calculating the ITR

• Cost of goods sold encompasses total amount of direct cost for producing goods including raw materials.
• Average inventory is the amount of inventory on hand over a specified time period.
• Average Inventory = (Starting Inventory + Ending Inventory)/2
• Number of days required to sell the available inventory on hand = 365/ITR
• A higher ratio indicates reduced storage and standing costs.
• A lower ratio suggests surplus inventory and poor sales.

Why does your business need inventory turnover ratio

ITR helps you determine whether you need more inventory to meet customer demand, or if you should invest in marketing and outreach efforts instead. Besides these, ITR offers several other benefits you should consider:

• Measure effectiveness of inventory management

  Inventory Turnover Ratio determines the number of times a company sells and replenishes its inventory within a given time frame. According to a Taylor and Francis research paper, ITR is directly linked to the inventory efficiency. As a result, it is imperative for companies to evaluate their inventory management through ITR.  

• Inventory planning and decision making

  An ITR indicates the time required to sell all the available items in your inventory. It helps you understand if you need to improve your stock management or minimize the number of items in the inventory, especially slow-moving ones. If you need to increase or decrease purchases from suppliers, this ratio will indicate that, too. You can accurately determine how many items need to be ordered from suppliers by looking at the average stock available and sales for a given period. Overall, ITR aids in planning your inventories and making right decisions accordingly.

• Determine liquidity of the organisation

  ITR helps to determine liquidity of the organization and understand profitability. High turnover shows that a company has enough demand for its products. This indicates that customers are happy with what they have purchased from your business and show no signs of slowing down their purchases. If your ITR is low, it means that your business isn't selling its inventory as quickly as it should. In such a case, you can consider reducing the cost of goods sold by lowering their prices or increasing your marketing efforts to get more customers.

• Assess the performance of competitors

  It provides a way for businesses to compare their performance relative to competitors, by looking at how quickly they sell through their inventory. If a business has an inventory turnover ratio of 2.0, it means that every two months, they sell twice as many items as they have in stock. If a competitor has an inventory turnover ratio of 1.5, it means that they sell through their stock at a rate that is 50% slower than your business.

Ways to boost your inventory turnover

Here are some of the inventory optimisation techniques to increase your turnover:

• Focus on efficiency of your inventory

  When you're trying to increase your inventory turnover rate, it's important to prioritize your inventory and eliminate stagnant inventory. Identify items that are frequently sold and replenish them regularly. Make sure that you have a proper system in place for tracking inventory, so that you know exactly when things need restocking.

• Optimise your Supply Chain

  Turnover can also be increased by streamlining your supply chain, making sure that all the products you sell are always available, at the right price and in the right quantity. This may involve making some changes to your business model or logistics system.

• Enhance Forecasting

  Forecasting is also important when it comes to managing inventory levels effectively. If you're able to predict how much product you can sell, you'll be able to plan better and avoid running out of stock.

• Revise Pricing Strategy

  Finally, revising pricing strategy is another way to boost turnover rate. If you have too many products in the same price range, this will make it harder for you to compete with other similar companies and make your customers more likely to go elsewhere.

• Automate to improve Insights

  Automating your inventory process can also improve turnover by giving you more time to focus on other aspects of the business. An automated system can provide insights into how much inventory you have and how often it sells. This allows you to make better decisions about what kinds of products to stock and how much stock to keep on hand.

Level up your inventory through Ginesys

The Ginesys Retail Management suite helps you increase inventory turnover by connecting your e-commerce, wholesale, and retail channels under one single platform. We help you manage the entire lifecycle of a product, from order placement to delivery and returns. With Ginesys, you can manage orders on all channels seamlessly, get real-time data, access reports that help you optimize operations, monitor inventory levels and sales trends across all channels.

Gain a competitive edge and optimize your inventory management through Ginesys.