The ideal ITR for your business depends on the size of your operation, your cash flow, how quickly you can liquidate your assets, and which products you're selling. There's usually a simple fix: adjust your ordering cycle to better match demand. The good news is that a high inventory turnover ratio can be a good thing. Although it's usually not a good idea to sacrifice profit for turnover, it's sometimes necessary-for example, when it's more costly to store " dead stock" in your warehouse than sell it off quickly. The slightest hitch in your supply chain can lead to a shortage, which means you might not be able to meet customer demand.Īlso, a company might have an ultra-high ITR while going bankrupt because the company isn't making enough profit on each sale. If you're continually restocking inventory right as you're running out of it, your inventory levels could get dangerously low. Contrary to some inventory management myths, extremely high turnover rate can be a bad thing and hurt your balance sheet and affect business performance. For example, a local business offering the same products as a national franchise might sell a lower volume of products less quickly. Inefficient supply chains, an excessive amount of inventory, and other operational inefficiencies can lead to stagnant inventory. That said, companies within the same industry can also vary in their turnover rates. That's natural because of the niche markets in which these industries operate. Luxury businesses like the jewelry industry tend to see a high-profit margin with low inventory turnover. That's because holding onto goods in these highly competitive, rapidly evolving areas can be exceptionally costly. These businesses, for example automobile and consumer electronics companies, need to sustain a higher turnover ratio. Industries with An Exceptionally High Holding Cost In general, moving inventory as quickly as possible is the most efficient path for low-margin companies. Here are a few circumstances in which your industry can affect your optimal ITR: Low-margin Industriesīusinesses in these industries, such as grocery stores and discount retailers, need to maintain high turnover to sustain a profit. The industry influences what the ideal inventory turnover ratio will be because of the nature of the products and markets available. You'll want to look a bit deeper into inventory turnover differences based on industry, the size of the business, and other factors. Optimizing inventory turnover is one of the most critical parts of inventory control. But while those numbers are good to know, your industry's average ITR isn't necessarily a good inventory turnover ratio for your business. Some organizations, such as ReadyRatios, track the median ITR in various industries. This ratio strikes a good balance between having enough inventory on hand and not having to reorder too frequently. What Is a Good Inventory Turnover Ratio?Ī good inventory turnover ratio is between 5 and 10 for most industries, which indicates that you sell and restock your inventory every 1-2 months. Inventory turnover is also known as inventory turns, stock turnover or stock turn. In simple terms, inventory turnover ratio reflects how fast a company sells an item and is used to measure sales and inventory efficiency. Inventory turnover is calculated by dividing the cost of goods sold by the average inventory for the same time period. Inventory turnover ratio measures the rate of sales and replenishment of an item over time. We will help you interpret that number and target the optimal inventory level for your business and industry.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |