Inventory turnover is a key performance indicator (KPI) that measures the efficiency of a company's inventory management. It is a ratio that compares the cost of goods sold (COGS) to the average inventory value over a period of time. The higher the inventory turnover ratio, the more efficiently a company is managing its inventory.
To calculate inventory turnover, divide the cost of goods sold by the average inventory value. For example, if a company had COGS of $1,000,000 and an average inventory value of $200,000, the inventory turnover ratio would be 5. This means that the company sold and replaced its entire inventory five times during the period.
A high inventory turnover ratio is generally seen as a positive sign because it means that a company is selling its products quickly and efficiently. This can lead to increased cash flow and profits. However, a very high inventory turnover ratio can also indicate that a company is not holding enough inventory to meet customer demand.
On the other hand, a low inventory turnover ratio can indicate that a company is holding too much inventory, which can tie up cash and lead to increased storage costs. It can also indicate that a company is not selling its products as quickly as it should be, which can lead to decreased profits.
Overall, inventory turnover is an important KPI that can help a company optimize its inventory management and improve its financial performance. By monitoring this ratio over time, a company can identify trends and make adjustments to its inventory management strategy as needed.
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