That is where knowing your stock turnover ratio comes in. Knowing this amount can inform the way you plan your buying, how you market your goods and much more.
In this guide, we’ll cover:
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What’s inventory turnover ratio?
Inventory turnover ratio is a means of measuring how often you’ve sold through and replaced your stock in a given period–just how many times it has turned over, in other words. Understanding your inventory turnover ratio provides you crucial insights into your business’ performance. A higher stock turnover ratio indicates a wholesome business, while a lesser ratio may spell trouble.
Holding on to stock for a long time is bad for business. If you are not selling your inventory, you are not earning revenue to cover your operating costs, turn a profit and–crucially–purchase new stock. As inventory gets dusty, dead stock, it holds you back from investing in new products customers may be interested in. In the end, you stand to get left behind by your competition.
Calculating your inventory turnover ratio means that you can avoid getting blindsided by non-refundable inventory. You can assess the health of your company, have a look at the consequences of new selling strategies, adjust your pricing and reassess your buying strategies as needed rather than waiting to respond after it is too late.
It’s important to remember that some businesses will see more stock turns than others just by the nature of the goods which are being sold. Apparel and perishable goods, as an instance, will turn faster than cars; fast trend will turn faster than luxury style.
How to calculate inventory turnover ratio
If you use your earnings, the formula looks like this:
Sales / Average Inventory = Inventory Turnover Ratio
In case you have your cost of goods sold on hand, you need to use that number rather than earnings.
If you utilize your cost of goods sold, the formula looks like this:
Cost of Goods Sold / Average Inventory = Inventory Turnover Ratio
In any event, you will have to understand your average inventory. You can compute that by using this formula:
(Beginning Inventory + Ending Inventory) / 2 = Average Inventory
Inventory turnover cases
Let us look at an example to understand. Say we wanted to calculate how fast our apparel store was turning over its shoe stock.
First, we will need to be aware of the cost of products sold. We assess our reports and see that the shoes sold in a year had a cost of $5000.
Quick suggestion: using Lightspeed? Locate your cost of goods sold with the built-in totals report.
Next, we will need to understand the cost of our beginning and ending inventory throughout the year. Once we have that information, we add the costs together and divide them by 2 for a total of $1300.
With those numbers available, we look at our stock turnover ratio formula.
5000 / 1300 = 3.8
We turned over our shoe stock 3.8 times this past year.
Alternately, if we did not need to do the math , we could only run the Turns report in Lightspeed Analytics and locate the sneakers top level category. The ratio will be recorded on the report.
What’s a fantastic inventory turnover ratio?
A higher stock turnover ratio is typically better. A high ratio generally tells you :
- You are buying enough stock. Your buying budget is set right along with your stock forecasting is accurate. You are buying sufficient to have full shelves to meet demand, but not so much that you are overstocked.
- Your workers are effectively selling your stock. Your customers are responding well to your sales strategies and your employees are providing great support.
But, it can also mean that you’re not putting in large enough orders once you restock. If your inventory turnover ratio is extremely high, your clients could be regularly running into empty shelves as they wait for one to reorder goods. Because this can drive away customers, it is important to keep an eye on how many times you wind up entirely out of stock.
Quick suggestion: in Lightspeed, set reorder points for all your things and operate the built-in reorder list report to avoid stockouts.
If You’ve Got a low stock turnover ratio, then you could be dealing with one or more of these problems:
- You have been overstocking. You are buying too many units on your orders, and clients are not reacting with the same demand.
- Your stock is not resonating with customers. Whatever you have on the shelves–even if you don’t feel as though you’ve overstocked–is not exactly what your customers want from you. They could be going to competitors to their needs rather.
- Your sales strategies are not strong enough. You might have the most cutting edge, desirable goods in stock… but if your client experience is not any good, you risk losing sales.
Assessing your stock turnover by industry
Just what is a low or high ratio varies by business . Fashion retailers average between 4 to 6 turns, by way of example, whilst automobile dealerships average a lower 2 to 3–but automobile parts can have turnovers as large as 40. As soon as you’ve your ratio, research your industry’s average number of turns to compare yourself to your contest.
How to Improve inventory turnover to your retail business
If your inventory turnover ratio is significantly lower than your business’s average, you will want to take action.
Fix your purchasing plans
Get your inventory in order with accurate inventory forecasting.
Compare the turnover ratio of different categories for their revenue figures and see where you can begin ordering less. If sales of a specific product or category have begun to drop off, you could combine ordering less of these with bringing in new products that are more in line with your best vendors.
Review your pricing plans
Pricing can drive away customers, even if the quality of the goods and their encounters land. If your sales are not strong, you could consider implementing some of the following pricing strategies:
- Volume prices: this is where clients save money based on how many units they purchase (1 for $3, 2 for $5, 3 for $7, etc).
- Seasonal discounts: if your retail company has a seasonal advantage –apparel seasons, for example–begin discounting incrementally earlier in the season. Rather than having blowout end of year sales at which you attempt to move a good deal of stock at steep discounts, begin with much smaller reductions about halfway through the season and increase the reduction from there.
- Bundle pricing: like bulk pricing, customers get more while paying less. Here, however, you bundle various items together to move inventory. It is similar to upselling, but with a few of the sales legwork done if you create the product bundles yourself.
Try new sales strategies
It is possible to improve weak revenue by making shopping with you exciting. Beyond just selling products, your employees are able to make your shop a memorable brand that customers want to return to.
Think about taking personal shopper appointments. You don’t have to be a luxury goods retailer to provide your clients a white-glove experience. Appointment shopping could be done during regular hours or after hours, online or in-person through video calls. It provides customers a more intimate shopping experience, which provides your employees with more opportunities for upsells.
Healthy company from higher turns
Your inventory turnover ratio is an important KPI which you should be keeping an eye on. Consider it as the canary in your coal mine–if it starts to fall, you know there is crucial work to be done optimizing your buying and adjusting your sales strategies
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