Hi Friend KH,
Do you know how to see your business sales effectively or not? Yep, if you want to find out, KH pals need to know how much stock they have, which is through the ratio of
inventory turnover
is one of them!
What is inventory turnover ratio? What are its benefits for business? And how to calculate it? Let’s see a more complete explanation below!
Definition of Inventory Turnover Ratio
Inventory turnover is a measurement of how effectively products are sold within a certain period of time by calculating the comparison with the average economic rate. The inventory turnover ratio will be a good indicator in determining the value of inventory quality and effective purchasing in inventory management.
inventory management
). In this ratio, there are two important components, namely stock purchasing.
stock purchasing
for inventory, and sales
sales
).
A high inventory turnover ratio indicates that the company does not spend a lot of money to buy merchandise and can optimize its expenses. This means that it can be said that the outflow of products is quite fast.
Conversely, if the inventory turnover ratio is low, then sales can be said to be not so good because it means that there are still products that are held in the warehouse. Even though production continues. This is something to watch out for.
For investors, the inventory turnover ratio can also be used to see and measure the liquidity of a company in question. This ratio measurement also shows how easily inventory can be sold so that it can be converted into cash.
Benefits of Inventory Turnover Ratio
There are several things that KH friends need to know about the benefits of knowing the inventory turnover ratio of a business, namely:
- Provide a Better Financial Position for the Company
Inventory turnover is an indicator of key performance or what is commonly called
Key Performance Index
(KPI). With the presence of this ratio, you will immediately be able to see whether the sales target is in accordance with the plan or not.
The calculation of inventory turnover ratio also shows the bank how liquid your assets are. Since inventory is often used as collateral for loans, when inventory turnover is high, it shows that inventory is easy to sell and can be quickly converted into cash.
- Make More Informed Business Decisions
By calculating the inventory turnover ratio, you can find out which products your customers really need and which items your customers are not interested in. Therefore, you can make smarter purchasing decisions, keep your merchandise moving, and sell more of the products your customers want.
That way, you can also make a list of raw materials needed for production activities. If everything is done, you will also be able to find out how many products are sold and how the competition is.
- Save on Expenses
By knowing what the inventory turnover ratio is, you can save money on production or when buying inventory. This is because storing inventory for too long also costs money. However, if the inventory turnover ratio is too high, it can also harm the company because the company will have difficulty meeting consumer demand. Transportation costs also become higher, which can be detrimental to the company.
Specifically, this inventory turnover ratio calculation will inform your decisions regarding:
- What items need to be ordered
If the stock turnover for a particular item is too high, it could be an indication that you need to order more.
- What products need to be removed from the warehouse
If there are stocks with low turnover, you can consider selling them before they become dead stock.
- What items should be ordered in advance to allow sufficient time for manufacturing/production/shipping
By knowing your inventory turnover ratio, you will be able to make plans to ensure that you don’t run out of stock prematurely.
How to Calculate Inventory Turnover Ratio
Now that you know the meaning and benefits of inventory turnover itself, of course KH friends also want to know, right, how to calculate it for business or company purposes?
There is actually nothing difficult in calculating the inventory turnover ratio. You just need to divide the Cost of Goods Sold (COGS) for a period by the average inventory for that period.
Before doing the calculation, make sure to know the formula for calculating the inventory turnover ratio, namely:
Inventory Turnover Ratio = Sales / Average Inventory
Since the ending inventory fluctuates greatly during the year, it is necessary to calculate the average inventory. This average inventory can be calculated by the formula:
Average inventory = (Beginning Inventory + Ending Inventory) / 2
So the formula for the inventory turnover ratio can be calculated as follows:
Inventory Turnover Ratio = Sales / ((Beginning Inventory + Ending Inventory) / 2)
Case Study Example:
A store that sells laptops reported its cost of goods sold on its profit and loss statement as Rp200 million.
The beginning inventory of this store is worth Rp250 million, while the ending inventory is worth Rp100 million. Then, what is the inventory turnover ratio of the laptop store?
Unknown:
Sales: IDR 200 million
Initial Inventory: IDR 250 million
Ending Inventory: IDR 100 million
So,
Inventory Turnover Ratio = Sales / ((Beginning Inventory + Ending Inventory) / 2)
Inventory Turnover Ratio = Rp. 200,000,000 / ((Rp. 250,000,000 + Rp. 100,000,000) / 2)
Inventory Turnover Ratio = 1.14 times
So, the inventory turnover ratio of this laptop shop is 1.14 times.
After finding out what your business’ inventory turnover ratio is, make sure to also find information that matches the statistics with your industry to see how your company ranks in terms of inventory turnover compared to competitors in the same field.
How to Improve Inventory Turnover Ratio
As mentioned earlier, good sales are business sales that have a high inventory turnover ratio. So, how to improve inventory turnover ratio?
There is no need to worry because we will provide tips to improve inventory turnover ratio.
- Do it
forecasting
As mentioned earlier, planning and forecasting sales is very important to ensure that the company has enough stock for consumers.
In this case, you can use several methods
forecasting
to forecast sales, such as
trend analysis, regression analysis,
and
time series analysis.
This depends on the available data and the specific industry.
- Automation of inventory management
Using an automated inventory management system will help you to improve accuracy and efficiency, as the sales data obtained will be more accurate by reducing human errors.
human error
), as well as reducing the time and financial resources required for stock tracking.
- Increase inventory stock when needed
One of the best ways to improve your inventory turnover ratio is to replenish your business inventory regularly. This can also be done in conjunction with monitoring your inventory levels and reordering merchandise as soon as stocks start to run low.
By keeping your stock full with new inventory, you will be able to sell more items and turn over inventory faster.
- Sell old stock
Selling old stock will help keep your inventory turnover ratio in good shape. This will help you to free up space for new products and keep your business running smoothly. Apart from holding a sale, selling old stock can also be done by offering more favorable purchase terms with a loyalty program.
- Smart pricing strategy
By more carefully evaluating the pricing structure, you can encourage consumers to buy more products quickly, resulting in high inventory turnover. The price offered should also allow your target customers to buy and provide a sufficient profit margin for operations.
KH Contact
How about KH friends, don’t you understand
inventory turnover
from the definition, benefits, how to calculate, to how to improve it? Keep in mind that every business has a different inventory turnover.
Therefore, if you want to compare inventory turnover with competitors, make sure the business is in the same industry! And make sure you can also place the best position in the market so you can see and understand the development of the business.
For KH friends who are or plan to set up a business and want to consult, let’s immediately contact Kontrak Hukum! We provide a variety of services that can support the development of your business ranging from business consulting, Intellectual Property Rights, legality, to the establishment of trade businesses.
Please visit https://kontrakhukum.com/menjalankan-usaha/ to see other excellent Contract Law services or contact via the following links Ask KH and
Direct Message
(DM) to our Instagram @kontrakhukum.
