It is essential to ensure that your customers never have to listen to that particular sentence as a business person. Whenever you hear the sentence “This product is out of stock”, it fills you with a sense of disappointment as a customer. Improving inventory replenishment levels.Premium pricing, seasonal pricing, and cost-plus pricing are some of the pricing techniques employed. Adjusting your prices bearing in mind the market fluctuations helps you have more control over your sales. Regular and timely review of pricing strategies can go a long way towards achieving high levels in sales. The customer gets their favourite product the business gets to clear out their inventory. Customers always love a good bargain, and offering them discounts on their favourite products is a win-win for the business and the customer. Marketing campaigns, attractive sales campaigns with discounted merchandise is commonly used tactic in the world of sales. This approach often results in the conversion of inventory into sales. The bundling option will also show the customer the price for guitar strings + a guitar case would look like. Whenever one places an order, for instance, an order for guitar strings. Offering two products of complementary nature together to boost sales is an effective technique to move merchandise. Tips to improve the inventory turnover ratio for business If the stock turnover ratio is high, it translates to higher liquidity since the business frequently receives money from its customers. Measures the liquidity of an organisation.Keeps a check with the industry standards of inventory turnover ratio.Facilitates movement of cash flows and thus helps manage the working capital requirements.Overall management of the inventory levels.
Evaluate how efficiently a company can control its merchandise.The ratio helps a business in the following ways.
This shows that the company is buying sufficient inventory levels to convert them into sales quickly and efficiently.īenefits of knowing inventory turnover ratio and its application Generally, it is important to have a high stock turnover ratio. The optimal inventory turnover ratio varies from industry to industry. This means that Ben’s Furniture and Fittings have sold their entire inventory only once in the entire year. 3,50,000 in their income statement during the current year. They reported the cost of goods sold as Rs. This is why average inventory is used.Įxample- Ben’s Furniture and Fittings sells furniture to corporate offices. The purpose of the term “cost of goods sold” is to reflect the true cost of the goods so produced and sold.Ĭost of goods sold = Opening stock + purchases – closing stockĪverage Inventory = (Opening stock + Closing stock) / 2įor most companies, their inventory levels fluctuate greatly throughout the year. These costs are directly linked with revenue. Another reason for low inventory turnover ratio is deficiencies in product manufacturing or marketingĬost of goods sold or revenue cost refers to the direct costs associated with the production of goods or services, including material, labour and overhead costs that are sold. On the other hand, overstocking of products and merchandise could lead to a low inventory turnover ratio. It can also be construed as a loss in sales opportunities as a result of inadequate inventory. The result of the stock turnover ratio formula refers to the number of times the company has managed to sell its entire stock in a given year.Ī high inventory turnover is not always an indicator of progressive performance levels. It establishes a relationship between the following elements. Inventory Turnover ratio = (Cost of Goods Sold)/ ( Average Inventory) Definition and interpretation of stock turnover ratioĪ company’s inventory turnover ratio, also known as the stock turnover ratio, demonstrates how efficiently it converts its inventory into sales.
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