It includes the cost of raw materials, labor, and overhead expenses directly related to production. To better grasp this concept, let’s break down its key components: Key Components of Inventory Turnover Cost of Goods Sold (COGS)ĬOGS represents the direct costs incurred in producing or purchasing the goods sold during a specific period. Inventory Turnover = COGS / Average Inventory Inventory turnover is calculated by dividing the Cost of Goods Sold ( COGS) by the Average Inventory. Conversely, a low turnover may indicate overstocking, slow-moving products, or inadequate demand forecasting, leading to potential financial strain and reduced profitability. The Relationship between Inventory Turnover and Business EfficiencyĪ higher inventory turnover generally signifies that your business is effectively managing inventory, reducing carrying costs, and quickly converting inventory into revenue. It is a key indicator of your business’s efficiency in managing inventory and can offer valuable insights into your supply chain and overall performance. Inventory turnover, also known as stock turnover or inventory turnover ratio, is a fundamental financial metric that measures how quickly a company sells and replaces its inventory over a specific period. One crucial metric that helps you achieve this is “Inventory Turnover.” In this detailed guide, we will walk you through the process of calculating inventory turnover, interpret the results, and provide actionable insights to improve inventory turnover for your business. As a business owner or manager, you understand the importance of efficiently managing your inventory to ensure smooth operations and maximize profitability.
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