How to Improve Inventory Turnover

Inventory turnover ratio refers to how many times a business is able to replace or sell its inventory in a given year. It is computed by taking into account the cost of goods sold and average inventory. The latter is calculated by the sum of the beginning and ending inventory, divided by two. It basically gauges the efficiency of a business. The higher the turnover ratio, the more efficient the company is in controlling its inventory levels. The general formula is cost of goods sold (income statement) divided by average inventory (balance sheets).

Instructions

  • 1

    Advance orders

    Although this may not be applied to some businesses, but taking advance orders may solve your hassle of predicting consumer needs. For instance, if you are running a socks factory, knowing that you have xxx number of pairs to produce will ensure that your inventory is not stacked up. Providing discounts may also entice customers to place orders in advance.

  • 2

    Forecasting

    Although forecasting can vary depending on the customer’s buying power, it is usually a good way to improve your turnover ratio. When introducing a new product or selling an existing one, it is important to gauge the customer’s willingness to buy. For instance, if you are selling t-shirts, where you have four colors to choose from, it is better to know which color/stock will sell fast. Generally, black remains in demand so probably you won’t have trouble selling it. As for the rest of the colors, if you feel that red is in fashion, then you will probably keep a large stock of red as opposed to other colors, say yellow and green. Keep a note of the market trend, and further ask customers about their responses.

  • 3

    Marketing

    Rigorous marketing before the launch of a product may lead to an increase in demand. This way you will have little trouble selling your product, with the target audience already waiting for the new arrivals.

  • 4

    Improving overall efficiency

    One way to increase turnover is to improve overall efficiency of your business. This will include production, delivery, improving managerial skills, as well as pursuing the right advertising and marketing techniques. This will further ensure a reduction in the safety stock.

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