While all of these are important, it’s the last that will help you determine the answer to my earlier question. Not brands, but each and every classification. One mantra I always adhere to is: “If you want to improve a situation, start by measuring it,” and the best measure of effective inventory levels I have found is inventory turn rates geared to each and every classification in the store. The balance and flow of inventory in each classification of your store helps maintain sales and cash flow. It depends on a variety of factors including your overall philosophy, but its implications for the success of your business, especially in lean times is all-important. The answer to the above question isn’t a simple one. Not enough inventory in the right class results in lost sales. The bad news is that your trade payables are up and you have no money in the bank!”Īt the end of a month, season, or year, “Would you like cash in the bank or surplus merchandise on the racks.” Too much inventory in the wrong class ties up working capital and creates an overinventoried position. While sales were off, you managed to keep your expenses in line. The good news is that you didn’t lose any money last year. After reviewing your books, your accountant turns to you: “I have good news and bad news. Things are starting to feel better intuitively and you sit down with your CPA to go over the results.
You’ve tightened the screws over the last year, trimmed the fat, and done everything you can to fine tune your business to meet the current challenges. It is calculated by dividing total purchases by average inventory in a given period. It is a good indicator of inventory quality (whether the inventory is obsolete or not), efficient buying practices and inventory management.
The inventory turnover ratio measures the number of times inventory has been turned over (sold and replaced) during the year.