All products—whether raw or finished—that a business keeps on hand with the intention of selling are considered inventory. Here is the tips about how to manage inventory. The rate at which inventory stock is sold, used up, and replaced is known as inventory turnover. The inventory turnover ratio is derived by dividing the cost of items by the average inventory for the same time period.
Just-in-time inventory management minimizes surplus inventory, so companies run with less stock. It’s an inventory management approach that helps a corporation maintain its supply chain lean and prevent extra stock.
This analysis classifies your inventory into tiers to assess how much is selling at a profit. Inventory analysis helps your organization determine what’s selling well and what needs a bigger profit margin to cover fixed and operational costs.
The other component of inventory management is niche-focused dropshipping. They handle product listings, payment processing, inventory management, and customer service.
They offer software, consultancy, inventory management, and shipping. This saves you time and money on setup.
When exporters sell items in bulk, they make bulk shipments. So, the exporter doesn’t have to worry about a consumer buying just one item; they can sell the complete batch wholesale for less.
Bulk shipments are sent from one point to another in a bulk carrier.
The cycle count tracks how many times an item is used throughout a day’s operations. The count begins with the first intended use. The count increases whenever the item is used.
The cycle count method helps you track inventories and save maintenance costs.
A simple guide to inventory turnover
Inventory turnover ratio.
Inventory turnover ratio measures how often a company sells and replaces inventory in a given period (a month or a year). The metric measures a company’s inventory management and sales efficiency. Identifies unused and obsolete stock.
The inventory turnover ratio shows how quickly things are bought and sold. So, the corporation can develop a balance where the goods are never stale in the warehouse but always in the right quantity.
A business with a high inventory turnover ratio will respond to demand better, have lower carrying costs per item, and generate more income.
Let’s compute the inventory turnover ratio.
Inventory turnover ratio calculation.
To compute the inventory turnover ratio, define COGS and average inventory. Let’s start there.
COGS is the cost of obtaining merchandise an e-commerce company sells during a certain period. So, in addition to per-item charges, it may include freight and other expenses. Add the cost of purchased products (including associated costs) to your initial inventory for a particular period and subtract your ending inventory to calculate COGS.
Initial inventory + additional expenditures – ending inventory
There are several automated accounting solutions for Shopify, Amazon, and other e-commerce platforms, eliminating the need for manual calculations. COGS is found in your income statement. Knowing how to accomplish it helps better grasp the metric.
Average inventory is a company’s mean inventory value over time (like a month, quarter, year, etc.). The simplified calculation (which is usually enough) includes starting and ending markers. Formula:
(Initial + Ending)/2 = Average Inventory (number of indicators)
A more advanced method divides the sum of interim indicators (such as monthly values) by the number of indicators.
- Initial inventory is a period’s beginning value.
- Ending inventory is the end-of-period value.
- Balance sheets show inventory at cost.
- Calculating inventory turnover
- COGS average inventory
The number shows how often you sold inventory throughout the analyzed period. If you want to know how long it takes to sell, you’ll need another inventory turnover formula:
Average Inventory COGS x 365
Both computations illustrate the same thing from different perspectives. Knowing how long it takes to turn inventory into sales helps you plan for the future or adjust your pricing and strategy if the ratio isn’t favorable.
How do you calculate inventory turnover?
E-commerce encompasses a variety of enterprises; therefore, determining a fair turnover ratio is challenging. Consumer products retailers can’t have the same inventory turnover as jewelry stores.
So, it’s wrong to talk about an industry-wide standard ratio. A range of 2 to 6 (some say 2 to 4) indicates a healthy firm, demonstrating you have enough inventory and don’t need to replenish often. Higher ratios indicate stronger business management. Much relies on what, how, and who you market. For e-commerce enterprises with higher profit margins that offer fewer, more expensive items, a ratio of 1 or 2 is normal.
How can you determine your ideal ratio? Look at similar firms in your niche to determine if you need to optimize your inventory turnover ratio.