by Carmen
Your inventory turnover ratio is a key performance indicator. A successful inventory management strategy is crucial to the success of your ecommerce brand. Regardless of whether you’re storing the products yourself or partnering with a third party logistics company, knowing the numbers that affect your operations and how you manage inventory can help increase efficiency and maximize your company’s cash flow.
What does inventory turnover rate mean?
Your inventory turnover ratio will show you how many times your company has sold and replaced inventory in a given period. Another way to think about it is, the ratio between sales and stocked inventory.
Calculating the inventory turnover ratio can help you make better business decisions on everything from pricing, marketing your product, manufacturing, and when to purchase new inventory. You can use your rate to compare yourself to other companies in your industry.
What is the inventory turnover ratio formula?
Step 1: Calculate your average inventory by taking the sum of the beginning inventory and ending inventory divided by 2
Average Inventory = (Beginning Inventory – Ending Inventory) / 2
Step 2: Identify your total sales revenue for the given period and divide that by your average inventory
Inventory Turnover Ratio = Sales / Average Inventory
Example:
Beginning inventory = $160,000
Ending inventory = $10,000
Total Annual Revenue = $300,000
Average inventory = ($160,000 – 10,000) / 2 = $150,000
Inventory Turnover Ratio = $300,000 / $75,000 = 4
If you sold 1000 units in the past year and had 1000 units in stock on average, your inventory turnover ratio would be 1:1. This means that you “turned over” your inventory once or had one “inventory turn”.
The inventory turnover ratio is a measurement shows how quickly a company sells their inventory when compared to industry averages. A low turnover rate could mean that the company has weak sales, poor marketing, or excess inventory due to overstocking. Lower turnover rates can lead to business issues such as high storage costs, products becoming obsolete and too much of your capital frozen in inventory.
What is the best inventory turnover rate?
All businesses are different so you’ll have to do some research on your specific industry to compare your company to competitors. Generally speaking an inventory turnover ratio of 4 to 6 is ideal for ecommerce businesses. A comparative ratio would mean that you do not run out of stock which allows you to meet customer demand and your warehouse doesn’t hold a high amount of unsold products.
How can working with a 3PL help?
Fulex’s warehouse management software gives you a detailed look at your stock levels and build inventory reports that allow your to analyze your current stock levels. You can also set reorder point notifications which will automatically remind you when your inventory needs to be replenished at the warehouse.
