Inventory turnover is a very important metric used to determine the data of all the products a business has sold by calculating the cost of goods sold and average inventory. ![]() This would also mean that overstocking has occurred in that specific accounting period. Whenever a business reveals a low inventory ratio, you can easily determine that it has been unable to convert its inventory into cash by not being able to sell the products before the next inventory cycle. In simple words, a higher inventory turnover ratio would mean the business has been able to perform quite efficiently compared to those who have a lower inventory turnover ratio. What Does Inventory Turnover Ratio Indicate?Ī company can use an inventory turnover ratio to indicate how well it has been able to perform the sales of all products in its inventory while also keeping in mind its total cost. Moreover, using this inventory turnover ratio, your business can also calculate the total time that your company would take to sell out all the inventory that is still present in hand. That is when the calculation of the inventory turnover ratio comes into the picture, which considers the total cost of goods sold and divides it by the number found from the average inventory. However, when it comes to seasonal fluctuation, a common occurrence for a business, the calculation of average inventory falls slightly short of its accuracy. ![]() Therefore, using the formula of average inventory, you can understand quite a few things about your business comprehensively. First of all, the average inventory is used to find out the stock in the business or the number that has been emptied before new inventory could be brought upon based on a few months or days. The inventory ratio works in a simple manner. Using this formula of inventory turnover ratio, your business would be able to find out the actual stock limits on which it has been operating through an end of an accounting year.
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