November 15, 2021

What Is A Good Inventory Turnover Ratio For Retail?

How often should you reorder inventory? This is a question that every retail business owner has to answer for themselves. There are many different factors that go into determining the best inventory turnover ratio, such as your product line and your profit margins.  Are you an ecommerce retailer with products coming in from overseas? Do you sell something like milk and bread, which don't have a lot of profit margin but need to be restocked quickly? Or do you sell high-end products with higher profit margins where it might make sense to wait until there's only one unit left before ordering more stock? In this post we'll explore some common numbers for how often retailers should reorder goods based on their needs.

What Is The Inventory Turnover?

The number of times inventory is sold in a year is referred to as inventory turnover. It is also known as "stock turn," "inventory turn," or "stock turnover." It is commonly computed for the year in accounting processes, but it can also be done monthly or quarterly.

When you average your inventory across a year, you can better understand your company's financial situation. Due to holidays, back-to-school, and seasonal clothes shopping, there will be peaks and dips in inventory throughout the year, skewing your results.

What Is The Inventory Turnover Ratio, And What Does It Mean?

The ratio used to determine inventory turnover identifies the cycles of a specific product over a set period. Understanding how quickly each inventory item is sold (turnover) can help your firm in a variety of ways:

- Purchasing

- Costing

- Ordering

- Cash Flow

- Margins

- Storage

Understanding your inventory turnover might also assist you in managing your business operations in other ways. And when you break it down into these categories, you'll see how crucial everything is.

Inventory Turnover Formula-How Do You Calculate It?

Using the cost of goods sold (COGS), you can calculate your inventory turnover utilizing the cost of goods sold (COGS). Because it considers the costs of the materials needed to make the item, this helps to prevent stock turnover inflation.

Costs of products are calculated by adding all production costs and new acquisitions made by the company to the beginning inventory of the selected reference period. The final prices of goods sold are calculated after subtracting any remaining stock at the end of the year. This amount is deducted from total sales to arrive at a gross profit rather than a net profit.

So, how can you quantify stock turnover precisely? The turnover ratio can be calculated using a simple formula, which can be found here.

Here is the inventory turnover formula:

COGS is the cost of goods sold per year, and then it is divided by the year's average inventory.

Here's an example of how to use this inventory turnover formula:

A shoe store sells over $600,000 in merchandise per year and has an average of $300,000 in inventory.

$600,000 in sales divided $300,000 in inventories equals 2

Using this calculation, we can determine that the inventory turnover of this company is 2. This meant they had to refill their whole inventory twice during the year. So said, this rate indicates that the company is profitable in its product sales.

Another Example:

A hair supply store sold $200,000 in products last year and had an average inventory of $500,000.

0.40 = $200,000 in sales divided by $500,000 in inventories

The inventory turnover rate for this company is 0.40, indicating that they are spending and keeping too many goods. So your not only losing money on a product that's just sitting on shelves but also paying for inventory storage.

What Is The Appropriate Inventory Turnover Ratio?

For most stores, the ideal stock turn range is between 2 and 4.

A percentage of less than this indicates that things are lingering on your shelf for far too long. Storage costs are high, whether it's on your retail shelves or in your warehouse. It could also indicate that you're overpricing things, aren't marketing effectively, or have underperforming employees. Use this data to help you spot potential issues.

The higher the inventory turnover ratio appears to be, the better. However, getting too high can be a problem. You may be buying things in more minor quantities than necessary, resulting in more outstanding delivery charges and maybe out-of-stock items. The best turnover rates vary depending on the type of shop. For example, stock turnover should be higher for retailers who sell perishable commodities.

Why Is The Inventory Turnover Ratio Important?

If you're not analyzing your inventory turnover ratio, you're likely missing vital information that might help you make better decisions.

Inventory turnover is essential since it is a key performance indicator (KPI) that can help you manage and grow your company more successfully. This figure is also a significant indicator that shows banks how liquid your company's assets are, helpful if you need to apply for a loan. Having a clear picture of stock levels and turnover rates can help you make better decisions about what things to buy, merchandise them, and sell them.

This ratio can assist firms in making decisions regarding:

- What things must be ordered, and how much must be ordered?

- What products would have to be put on the market?

- Orders should be planned ahead of time to allow for lead time.

How Can Inventory Turnover Be Improved?

Now that we know why measuring stock turnover is crucial let's look at some approaches to enhance inventory turnover.

Utilize Comprehensive Inventory Management System

To begin with, you can't improve or optimize an inventory turnover rate unless you have the suitable instruments to measure it. This is why businesses require a POS and inventory management system to track sales and inventory levels in real-time and create comprehensive reports.

Not only would a POS system with built-in inventory management help you to keep track of inventory in real-time, but it would also record sales, numbers, and reports on all other elements of your business without the need for manual entry. In addition, a competent POS Inventory Management System can automate most processes that would otherwise be performed manually, saving you time and money.

Other advantages include:

- Enhances cash flow while lowering overall costs

- All corporate data is centralized and automated,

- Barcode management is simple.

- Create New Ways To Sell Inventory That Isn't Moving Fast Enough

If your inventory turnover is slow, it's essential to increase your sales and marketing efforts to sell more products. While there is no one-size-fits-all solution for increasing sales in retail establishments, several tactics can help.

Here are some suggestions for sales:

1. Upsell and cross-sell campaigns should be taught to employees.

2. Encourage the sale of items that have been indicated.

3. Set sales goals for your team and reward them if they meet them.

4. Teach your employees how to market effectively.

5. Examine your visual merchandising.

6. Make a limited-time offer on slower-moving inventory lines.

Proper Foresight

Seasonal demand, one-time goods, and trends are just a few variables that might affect inventory levels. As a result, eliminate guesswork by anticipating orders and stock levels based on yearly and quarterly sales data.

Better yet, carefully examine sales data and identify the best-selling and trending items so that these figures can be factored into sales predictions and budgets.

Effective Marketing

The marketing plan for your company could be a critical factor in increasing inventory turnover rates. With a good marketing strategy, you can concentrate on selling less and reaching out to more people.

Using all available marketing tools to reach new audiences and demographics can help you develop your business. Sales of products can improve due to an influx of new customers, which will enhance inventory turnover rates.

You can improve your marketing by doing the following things:

- Use networks like Facebook, Instagram, Twitter, and Tik Tok for social media.

- Have a website that is simple to navigate.

- Email marketing.

- Loyalty programs.

- Advertising.

- Improve your search results by using an SEO plan.

Pricing Tactics That Work

Pricing can be complicated, mainly if your company distributes things globally via an online platform. The majority of firms will find that a single pricing approach will not work for all items in their inventory.

As a result, it is essential to apply a multilayer inventory pricing strategy based on relative considerations. These can include the following:

- Christmas and Easter supplies, for example, are seasonal commodities that must be sold by a specified date.

- Variations in the seasons.

- Costs of shipping.

- Discounts are available for bulk purchases.

- The current state of affairs

A POS System Improves Your Inventory Turnover Ratio

Your retail store's point of sale system is the hub of all communication. Therefore, it must be quick, simple to use, and feature-rich to assist you in correctly managing all parts of your retail business, including inventory.

- With our built-in Inventory Management system, you can easily track and manage inventory levels.

- Integrate with over 100 popular business products for better marketing, increased client loyalty, and easier bookkeeping.

- Accept payments by credit, debit, gift cards, and contactless technology.

- With 24/7 cloud access, you can manage your restaurant from anywhere.

Summing Up

Knowing which products to have on hand and how much to order can make or break your retail business. You can stay on top of such decisions and keep carrying the right products at the right time if you have a firm handle on your inventory turn.

Hopefully, the advice in this article will help you do just that.

Best of luck!

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