What is Inventory Turnover, How it Affects Business Profit, How to Increase Inventory Turnover
It is a commonly acknowledged fact that by reducing the time that it takes to turn over the inventory for your business, you can increase the earning potential and profit as well. The business is considered to have turned over its inventory when it has replaced 100% of the original inventory. Important factor to be considered when maintaining your inventory and business stock is calculating the needs time.
The needs time is calculated by adding the count cycle plus order cycle plus delivery cycle. The count cycle is the time after which you decide to count your inventory. Order cycle it is the time that it takes you to finish the counting, process the paperwork and place the order with the supplier. The delivery cycle is the time that it takes for the fresh inventory to reach your business.
So considering an example where you count your inventory every six weeks and it takes you one week to finish counting and placing the order, your count and order cycle are six and one week respectively. If it takes further three weeks for the inventory to reach your business, the delivery cycle is three weeks. Adding these three figures you get a total cycle of 10 weeks which is your needs period.
Assuming that you sell 10 units every week, you will need to order fresh inventory by multiplying 10 into 10 which comes to 100 weeks in advance so as not to fall short in the middle of the sales. You need 10 weeks worth of inventory from the first day of the count cycle to sustain business until fresh merchandise arrives.
Now most businesses believe that if they can manage to turn over their inventory faster, they can enhance their profits. Presuming that the demand exists for the business product.
Turning over the inventory quicker means that you sell more business merchandise. This automatically means that your business makes more profit.
You can improve your inventory turnover by doing a few things yourself and working in a more streamlined manner with your distributors. For example, you can begin to count inventory every three weeks rather than every six. You could work with your distributors and suppliers to find more efficient ways of shipping merchandise to your business to reduce the time it takes for the delivery cycle. If you can achieve both these things and cut both these time periods by half, you could increase your inventory turnover by doubling it and therefore doubling the business sales as well.
Another way to look at the inventory turnover is by measuring sales per square foot. This method is not just helpful in calculating your inventory turnover but also in calculating the cost of storing and maintaining your inventory.
You take the average retail value of the inventory and divide it by the number of square feet devoted to a product. This gives you the average sales per square foot. You will be able to calculate how many sales per square foot per year you need to break even with the cost of running the business. You should calculate your sales per square foot once a month to make sure that all calculations are according to your expectations.
Knowing the cost of inventory per square foot also helps you measure the cost of storing the stock in godown and warehouses. This lets you control the amount of inventory you want to stalk by reducing excess inventory.