What is Inventory Turnover Ratio?
Inventory turnover ratio is a critical financial metric that measures how many times a business has sold and replaced its inventory over a specific period. A high ratio indicates strong sales and efficient inventory control, while a low ratio suggests overstocking, obsolete products, or weak demand.
How to Calculate It
The formula is simple: Cost of Goods Sold (COGS) / Average Inventory.
For example, if your yearly COGS is ₹1,00,00,000 and your average inventory value is ₹20,00,000, your turnover ratio is 5. This means you cycle through your entire stock 5 times a year.
Strategies to Improve Your Ratio
- Forecast Demand Accurately: Use historical sales data and seasonal trends to purchase just the right amount of stock.
- Liquidate Slow-Moving SKUs: Bundle dead stock or run flash sales to clear warehouse space and free up capital.
- Automate Replenishment: Inventory management systems can automatically generate purchase orders based on velocity to prevent over-purchasing.