![]() ![]() This way, you can see the ratio decrease or increase quickly. ![]() Plus, you can calculate your inventory turnover rate for the last 365 days (versus waiting until the end of the quarter or the year) to see if you’re improving your inventory management. And when you use these forecasts to inform your inventory planning, you avoid buying slow-moving SKUs and only purchase inventory that will actually sell. Make smarter and more strategic decisionsĭemand forecasts are the best way to improve your inventory velocity. Meaning, you tie up too much capital in inventory and wreck your profit margins.īut when you proactively improve your inventory velocity, you optimize inventory to boost profits and increase the ROI on your initial investment. Increasing your revenue is great, but if you don’t reduce costs, you end up operating against yourself. This puts you at risk of frequent stockouts, which lead to lost sales and customer dissatisfaction. ![]() However, if it keeps trending upwards, your inventory levels won’t be able to meet customer demand. Avoid inventory deficienciesĪ high turnover rate signifies strong sales and a quick inventory cycle. Generally speaking, the longer inventory sits, the less likely it will sell (and more likely it becomes dead stock).īut when you maintain a high inventory velocity, you reduce the odds of obsolescence - by selling products quicker and getting rid of inventory faster. These units rack up warehouse fees that cut into your gross profit margins.īut when you monitor your inventory velocity (and work toward optimizing it), you get rid of that inventory faster and minimize holding costs. When you have a low inventory turnover ratio, it means you have excess inventory that’s been sitting around for too long. They keep only enough inventory on hand to properly meet demand, which reduces operating costs, increases revenue, and improves the brand’s bottom line. When retailers have a healthy inventory velocity, they achieve inventory optimization. Why is it important to monitor the inventory velocity ratio Meanwhile, anything more than 4 indicates a stockout risk. Generally speaking, you want an inventory turnover rate between 2 and 4.Īnything less than 2 means you have too much dead stock. Inventory turnover helps brands determine if they have too much or too little stock to meet demand. Inventory velocity (AKA, inventory turnover) measures the number of times a company sells and replaces its inventory in a given period (usually 1 year). That’s where your inventory velocity calculation can help. And you’re likely hurting your bottom line as a result. That leaves the sweet spot somewhere in the middle.Īnd if you’re like most direct-to-consumer (DTC) brands, you probably don’t know where exactly you sit between these 2 points. Too much, and you tie up cash flow, rack up holding costs, and wreck your profit margins. Here’s how to make it happen using the inventory velocity calculation.ĭoes your brand carry the right amount of inventory? (Think carefully before answering.)īecause when you have too little inventory, you run into stockouts and miss out on revenue. The important issue is that any organization should be consistent in the formula that it uses.Imagine Enough inventory to meet demand without exorbitant holding costs. Inventory Turnover = Net Sales Average Inventory at Selling Price Inventory turnover is also known as inventory turns, merchandise turnover, stockturn, stock turns, turns, and stock turnover. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. It is calculated to see if a business has an excessive inventory in comparison to its sales level. In accounting, the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. ![]()
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