Definition of Inventory turnover:
Inventory Turnover = Sales / Average Inventory.
Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing and purchasing new inventory.
Number of times a firms investment in inventory is recouped during an accounting period. Normally a high number indicates a greater sales efficiency and a lower risk of loss through un-saleable stock. However, an inventory turnover that is out of proportion to industry norms may suggest losses due to shortages, and poor customer-service. The preferred method of computing inventory turnover is to compare the cost of sales (also called Cost Of Goods Sold or COGS) to average inventory (Cost of sales ÷ Average inventory). Another method, which compares net sales revenue to the inventory (Net sales revenue ÷ Inventory) is also used but it introduces the distortion of sales markup that is not documented in the inventory records. Also called inventory turns or stock turnover.
How to use Inventory turnover in a sentence?
- This helps businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory.
- I saw that our inventory turnover was good and that made me relived because I was worried about if for a bit.
- When you have a high inventory turnover you need to make sure that your factory can put out enough of your product.
- If you have a high inventory turnover that is very likely a good thing because it means your products are flying off the shelves.
- A low turnover implies weak sales and possibly excess inventory, while a high ratio implies either strong sales or insufficient inventory.
- Inventory turnover shows how many times a company has sold and replaced inventory during a given period.
Meaning of Inventory turnover & Inventory turnover Definition