Optimizing inventory turnover will help businesses increase revenue and reduce costs. Because when determining the inventory turnover index, leaders can plan production, import goods as well as manage inventory quantities extremely easily. So what is inventory turnover and how is it calculated? Let's find out in the section below.

What is inventory turnover?

Inventory Turnover, in English, is an index used to measure the number of times a business sells its inventory in a certain period of time. Inventory Turnover is considered an important financial indicator that helps leaders accurately measure inventory management capabilities throughout the entire operation of a business.

Inventory turnover represents the number of times a business sells inventory during a certain period of time

When people want to analyze business performance, they often calculate the inventory turnover ratio to compare the ratio between sold goods and stocked goods during the same given period of time. From there, managers know which products are being imported and exported ineffectively so they can have ways to adjust sales more effectively.

Meaning of inventory turnover

As many people know, a large amount of inventory means a high amount of capital "locked up" in warehouses. On the contrary, if there is not enough inventory, production and distribution will be interrupted. Therefore, balancing inventory is the best "key" for businesses to operate stably. To ensure this factor, calculating inventory turnover is very important.

Inventory turnover ratio helps businesses:

• Determine the enterprise's inventory management ability through comparing data over the years
• A high coefficient shows that the turnover rate of goods in the warehouse is fast
• A low coefficient shows that the turnover rate of goods in the warehouse is slow, low, and the inventory is large.
• Inventory turnover ratio can help businesses make better decisions about pricing, production, marketing and purchasing. This is one of the efficiency ratios that measures how effectively a company uses its assets.

How to calculate inventory turnover

The inventory turnover ratio is calculated by dividing sales by the average inventory value for the same period.

Formula to calculate inventory turnover:

Inventory Turnover = Revenue/Average Inventory Value

In there:

• Revenue is the total revenue of a business's sales cycle. If your business controls this index by year, it will take the total revenue of the entire year (365 days).
• Average inventory value is the average value of the beginning and end of the inventory cycle.

Example of inventory turnover

Actual problem: The total revenue of the business in 2021 is 900 million and has an inventory value of 30 million VND.

Applying the above formula for calculating inventory turnover, we get:

The turnover ratio will be equal to: 900,000,000 / 30,000,000 = 30. So it can be seen that you have turned inventory 30 times in 2021.

Number of days in a rotation/year: 365/30= 12.17. With these numbers, you can understand that your business will receive new goods every 12.17 days. Based on that, you can estimate the appropriate time to import goods and have a more specific business plan.

How much inventory turnover is good?

This is a question often asked when calculating inventory turnover. The higher this index, the better the business's sales. However, there will also be some risks that businesses will not have enough supplies to supply the market if the demand for that product suddenly increases sharply. Then direct competitors will take the opportunity to attract a large number of customers to the business

A reasonable inventory turnover index depends on many factors such as product type, cash flow or market, etc. Therefore, depending on each business, inventory turnover will have appropriate indices.

Several factors affect inventory turnover

• Purchasing demand: This is probably the factor that most affects inventory. If the product does not reach the right target customers and does not stimulate purchasing demand, businesses will have difficulty selling products, causing inventory turnover to decrease. So, create a marketing plan that targets your target customers and increase your promotional programs. This will help significantly improve the Inventory Turnover index.

• Purchasing trends: Usually on important occasions of the year, such as holidays, market demand will increase suddenly. Anticipate this trend to rebalance your business's supply sources. You can encourage customers to order in advance so that the business can prepare the best products.

• Sales method of the business: If customers already know the product and want to buy it but you cannot stimulate customers to buy more, this index will not reach the expected level. So, plan to attract customers to increase order value each time they shop, train a professional sales team to be able to advise and cross-sell more products, and help keep goods in the warehouse continuously filled. new, thereby increasing inventory turnover.

• Grouping groups of goods that do not have the same properties: If you calculate all the items that the business provides together, it will create an inaccurate circular coefficient. Items with high profit margins should not be grouped with items with low profit margins. Otherwise, the inventory turnover is no longer accurate.

6 How to optimize inventory turnover

Here are 6 ways you can optimize inventory turnover for your business:

Stimulate shopping demand: By creating marketing promotions, incentives, gifts, etc. for customers, businesses can increase the inventory turnover index.

Dividing product groups: Businesses need to divide into a group of best-selling products and slow-selling products, thereby having an accurate import and sales policy for each group.

Increase order value: Analysis of factors that can increase order value such as pricing strategy, customer service staff training, sales, upselling, cross-selling, etc.

Work with suppliers to get low import prices: Negotiate with suppliers to get the best import prices.

Use software to improve forecasting:  Sales numbers and inventory reports provide much of the hard data needed to make inventory forecasts more accurate. This data can also help with future sales planning, such as buy 1 get 1 free policies to push slow-selling inventory.

Develop a pricing strategy: Price is one of the important factors affecting the consumption level of goods. Therefore, businesses need to review pricing strategies and analyze the impact of each strategy on sales. Without a specific strategy, price reductions are unlikely to increase sales and customers may only buy a business's products when they receive incentives. Therefore, businesses need to consider more long-term options. For example: Premium, negotiation, seasonal, delivery method, different prices for different customers, cost plus price (bonuses and added value to the order), Popular pricing strategy with price,…