If a company has a high inventory turnover, i.e., products are selling quickly, which is usually a good sign for future sales. There are several reasons why the inventory turnover formula is so important:ġ) It’s a leading indicator of future sales. Reasons Why Inventory Turnover Ratio Matters It shows how well a company manages inventory that comes from suppliers and moves through the supply chain. The inventory turnover ratio is one of the gauges of that movement. Inventory movement operations are one of the primary measures of future business success. It would not be an exaggeration to state that the stock movement through the supply chain is the essence of the business for many companies. Understanding inventory turnover is a crucial step toward solid business performance. The ratio’s role is to assess a company’s performance from the point of generated sales. It takes the cost of goods sold relative to the average inventory of some period.
Inventory turnover, or inventory turns, refers to the number of times a company’s inventory is sold or used up over a while. Raw materials are the unprocessed inputs used in manufacturing (e.g., steel, plastics, fabrics). While “on hand” usually means physically present at the company’s facilities, it can also refer to inventory that’s en route but not yet received. Inventory refers to all the raw materials, work-in-progress, and finished goods that a company has on hand at any given time.
First things first! Let’s define the main terms and see how the inventory turnover ratio formula is derived.
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