Want to know if your organization’s inventory management system is running efficiently? Start by measuring your annual inventory turnover ratio. Like the Boy Scouts of America, your company’s inventory should do several good turns annually!
The annual inventory turnover ratio is the number of times a company sells its inventory in the course of a year. You calculate your inventory turnover ratio using this equation:
Total cost of goods sold in one year / Average total cost of inventory on hand in that year = Annual inventory turnover ratio
The reason you want to run an inventory turnover ratio on an annual basis is because many companies experience seasonal changes in demand. Some products are more popular in the winter or summer, so it’s important to level the playing field by measuring the whole year and not just a quarter or month.
Fishbowl Inventory has an inventory control tool that will calculate this ratio for you.
What’s a Healthy Inventory Turnover Ratio?
In most cases, the higher the inventory turnover ratio the better. However, you should try to find the balance between too low and too high of a ratio because both can lead to trouble.
Too low a ratio means that you might have too much inventory on hand and you’re risking product spoilage or obsolescence. Too high a ratio means you might be under-stocked and you risk product shortages and unhappy customers.
A healthy ratio is dependent upon your industry. Grocers and food producers want to turn their inventory over dozens of times a year to ensure they’re selling products before they reach their expiration dates. Mattress producers and car sellers probably have a different idea of a healthy ratio because their products have a higher cost and markup.
How Do You Improve Your Inventory Turnover Ratio?
Use Fishbowl’s inventory control software to help you improve your inventory turnover ratio. Fishbowl Inventory offers a number of customizable reports and other tools to help small businesses successfully manage their inventory. Schedule a demo of Fishbowl Inventory today.
You might be surprised by what turns up when you run an annual inventory turnover ratio!