Implementing a First-In, First-Out (FIFO) system is critical for perishable goods to prevent old stock from expiring. Conversely, low turnover is a warning sign of overstocking, poor product-market fit, or declining demand, which can lead to inflated holding costs and potential obsolescence.
Smart Purchasing Decisions: Analyzing Inventory Turnover for Better Results
Advanced Analysis: The Inventory Turnover Days Metric While the ratio is useful, converting the analysis into inventory turnover days provides a clearer picture of the actual time products spend in stock. This is calculated by dividing the number of days in the period by the inventory turnover ratio.
Calculating the Inventory Turnover Ratio The core calculation involves dividing the cost of goods sold (COGS) by the average inventory for the period. A grocery store will naturally have a much higher turnover than a luxury furniture retailer due to the nature of the products.
Smart Purchasing Decisions: Analyzing Inventory Turnover for Better Results
Additionally, targeted promotions or discounts can be used to clear slow-moving items, freeing up capital and warehouse space for more profitable products. The average inventory is typically derived by adding the inventory value at the start and end of the period and dividing by two.
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