Question 1

What is inventory turnover?

Accepted Answer

Inventory turnover is a financial ratio that measures how many times a company sells and replaces its inventory during a specific period (typically a year). It indicates how efficiently a business manages its inventory. The formula is: Inventory Turnover = Cost of Goods Sold (COGS) ÷ Average Inventory. A higher ratio means inventory moves quickly, while a lower ratio suggests slow-moving stock.

Question 2

How do you calculate inventory turnover ratio?

Accepted Answer

Calculate inventory turnover ratio in 3 steps: 1) Calculate COGS for the period (usually annual), 2) Calculate average inventory: (Beginning Inventory + Ending Inventory) ÷ 2, 3) Divide COGS by average inventory. Example: $500,000 COGS ÷ $100,000 average inventory = 5x turnover ratio. This means inventory turned over 5 times during the year.

Question 3

What is a good inventory turnover ratio?

Accepted Answer

A 'good' ratio varies significantly by industry: Grocery/Food: 15-20x (perishables turn quickly), Retail: 8-10x (seasonal variations), E-commerce: 10-12x (lean operations), Manufacturing: 6-8x (longer production cycles), Automotive: 8-10x (expensive inventory), Luxury goods: 3-5x (exclusive products). Compare your ratio to industry benchmarks, not absolute numbers.

Question 4

How do you calculate days inventory outstanding (DIO)?

Accepted Answer

Days Inventory Outstanding (DIO), also called Days Sales of Inventory (DSI), shows how many days it takes to sell through inventory. Formula: DIO = 365 ÷ Inventory Turnover Ratio. Example: If turnover is 5x per year, DIO = 365 ÷ 5 = 73 days. This means it takes an average of 73 days to sell inventory. Lower DIO generally indicates better efficiency.

Question 5

What causes low inventory turnover?

Accepted Answer

Low inventory turnover is caused by: 1) Overstocking based on optimistic forecasts, 2) Poor demand forecasting and planning, 3) Obsolete or slow-moving products in the mix, 4) Weak sales and marketing execution, 5) Seasonal products held year-round, 6) Long lead times requiring large safety stock, 7) Buying excess to get volume discounts, 8) Lack of inventory management systems. Low turnover ties up working capital and increases carrying costs.

Question 6

How can I improve inventory turnover?

Accepted Answer

Improve inventory turnover by: 1) Implement better demand forecasting using historical data and trends, 2) Reduce slow-moving SKUs and focus on bestsellers, 3) Negotiate shorter lead times with suppliers, 4) Use just-in-time (JIT) ordering for predictable items, 5) Run promotions to clear aging inventory, 6) Improve product descriptions and marketing to boost sales, 7) Conduct ABC analysis to segment inventory by importance, 8) Implement inventory management software for real-time tracking.

Question 7

What is the difference between inventory turnover and days in inventory?

Accepted Answer

Inventory turnover and days in inventory measure the same thing differently. Inventory Turnover = number of times inventory is sold and replaced (e.g., 6x per year). Days in Inventory = number of days inventory sits before being sold (e.g., 61 days). They're inversely related: Days = 365 ÷ Turnover. High turnover = fewer days. Turnover focuses on frequency, while days focus on duration.

Question 8

Can inventory turnover be too high?

Accepted Answer

Yes, excessively high inventory turnover can indicate problems: 1) Frequent stockouts leading to lost sales, 2) Insufficient safety stock for demand variability, 3) Higher shipping costs from frequent small orders, 4) Missing volume discounts from suppliers, 5) Inability to fulfill sudden demand spikes, 6) Customer dissatisfaction from backorders. The goal is optimal turnover that balances efficiency with service level—typically maintaining 95%+ product availability.

Question 9

How does inventory turnover affect working capital?

Accepted Answer

Inventory turnover directly impacts working capital efficiency. Higher turnover = less cash tied up in inventory = more working capital available for growth, marketing, and operations. Formula: Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding - Days Payables Outstanding. Reducing DIO by improving turnover accelerates cash conversion, improves cash flow, reduces storage costs, and decreases obsolescence risk. This creates a more agile, financially healthy business.

Question 10

What's the relationship between inventory turnover and profitability?

Accepted Answer

Inventory turnover affects profitability through multiple channels: 1) Higher turnover reduces carrying costs (storage, insurance, depreciation), 2) Faster turnover means fresher products and less obsolescence, 3) Better cash flow from higher turnover enables growth investments, 4) Reduced need for markdowns and clearance sales, 5) Lower inventory financing costs. However, balance is key—turnover that's too high can cause stockouts and lost profit. Optimal turnover maximizes both revenue and margin.

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