What Does a High Inventory Turnover Rate Mean? A Closer Look
If you want the best return on your investment, it pays to have a high inventory turnover rate. A business with an inventory turnover rate of more than 100% will make double the profit of one with a 50% or less turnover.
But what does that mean for your business? What is an inventory turnover rate, and how can you ensure your business achieves or exceeds it?
This blog post will answer those questions and more. Read on to learn more about inventory turnover rate and what it can mean for your business.
What Is Inventory Turnover?
Essentially, inventory turnover is a measure of how quickly your business sells its inventory.
A high turnover rate indicates that your business is selling a lot of products and can keep its shelves stocked with fresh inventory.
On the other hand, a low turnover rate could indicate that your business is struggling to move its product. Your business may therefore be at risk of being stuck with obsolete inventory.
So what’s a reasonable turnover rate? That depends on your industry and your specific business model. Generally speaking, a high inventory turnover rate is preferable to a low one.
How Can You Calculate Inventory Turnover?
There are a few different ways to calculate inventory turnover. The most common is the cost of goods sold (COGS) formula:
Inventory turnover = COGS / Average inventory
This equation considers the cost of the products sold rather than just the number of products sold. This is a more accurate reflection of how quickly your business is selling through its inventory.
You can also use this equation to calculate the average day’s inventory on hand (DIOH). DIOH is the number of days it would take to sell all of your inventory at the current sales rate.
Inventory turnover = COGS / (average inventory * 365)
Click here to learn more about the inventory turnover ratio formula.
What Does Inventory Turnover Mean for Your Business?
Now that you know what inventory turnover is and how to calculate it, let’s look at what it means for your business.
A high inventory turnover rate means that you are selling through your inventory rapidly and have a high demand for your products. This is a good indicator that your business is healthy and has a strong market position.
A low inventory turnover rate could indicate that you are not meeting customer demand or that your products are not resonating with consumers. It could also mean that you have too much inventory on hand, which can be costly and risky.
It’s important to note that high inventory turnover does not necessarily mean increased profits. Your COGS may be high if you are regularly selling new products. However, a high inventory turnover rate is still an indication of a healthy business.
How Can You Improve Your Inventory Turnover?
If you’re not happy with your inventory turnover rate, you can do a few things to improve it. Let’s take a look at some of the most effective strategies.
Lower Your Stock Levels
Keeping your stock levels low means you won’t have as much inventory to sell, but it will help you quickly move through your stock.
You can achieve this by regularly evaluating your sales data and ensuring you’re not overstocking items. You may also want to consider using a forecasting tool to help you predict future demand for specific items.
When you know what will be popular in the near future, you can order just enough stock to meet that demand. Don’t order too much and have it sit on the shelves.
This strategy can be a bit risky, but it can be very effective if done correctly.
Streamline Your Processes
If you want to improve your inventory turnover rate, you need to make it easy for your customers to buy from you.
This means streamlining your processes so that customers can find what they’re looking for and check out quickly.
It also means ensuring that your inventory is well-organized and easy to access. If products are hidden away in the back of the store, customers are less likely to find them.
Make sure everything is easily accessible and clearly labeled so customers don’t have to search for what they want.
Offer In-Store Pickup
In-store pickup is a great way to improve your inventory turnover rate because it allows customers to buy items online and pick them up at the store.
This eliminates the need for customers to wait for items to be shipped, which can often take several days. It also allows customers to try on items before they buy them, which can help reduce returns.
Use Fulfillment Centers
If you’re struggling to keep up with demand, a fulfillment center can be a great solution.
A fulfillment center will take care of picking, packing, and shipping products for you.
This is an excellent option for businesses that are growing quickly and don’t have the resources to handle all of the logistics themselves.
Invest in Technology
Technology can be a great way to improve your inventory turnover rate.
For example, using a Point-of-Sale system can help you track sales data and predict future demand. This will help you order the correct amount of stock and avoid overstocking items.
Using a warehouse management system can also help you keep track of your inventory and ensure that everything is organized and easy to find.
Get High Inventory Turnover Today
When it comes to getting a high inventory turnover rate, there are a lot of different strategies you can try. Find the ones that work best for your business and implement them as soon as possible. Improving your inventory turnover rate can significantly impact your bottom line, so don’t underestimate its importance.
If you’re looking for more business-related information, check out the other articles posted on our website.