![]() The average days to sell the inventory is calculated as follows:Īverage days to sell the inventory = 365 days / Inventory turnover ratioĪ low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort.Inventory turnover = Cost of goods sold/Average inventoryĪverage inventory = (Beginning inventory + Ending inventory)/2 Inventory turnover is also known as inventory turns, stockturn, stock turns, turns, and stock turnover. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. The company's management is interested in keeping its inventory turnover high because this would reflect that the firm is not purchasing too much inventories and at the same time is not storing the excessive inventories, which are slowly convertible to finished goods.In accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period, such as a year. The inventory turnover is an important indicator of the firm's efficiency. In year 2 the company has reduced this value to to 29,4, indicating that a company has been intensifying its sales. In year 1 company averagely needed 33,5 days to turn its inventory into sales. And vice versa, if the company's financial report is reflecting the data from the periods of the company's economic activity peaks, the turnover calculated will be higher, and the period of one turn will be lower than they actually are. Because of this, the computed period of one turn of the average inventories will be higher than it actually is. The economic activity of the company slows down at the end of the year, which means that the inventories, unfinished goods, finished goods stock will be lower. Should be mentioned that the value of the inventory turnover (days) can fluctuate during the year (for instance, due to the seasonality factor). Inventory Turnover (Days) = 360 ÷ Inventory turnover (Times) Inventory Turnover (Days) = Average Inventory ÷ (Cost of Goods Sold ÷ 360) This would reduce the expenses or increase the company's income if the money is invested in the firm's activity intensification. Decreasing the inventories volume would allow shortening the necessary amount of financial resources. To do this the ABC-analysis, XYZ-analysis and other methods can be applied. ![]() In case the inventory turnover value exceeds the normative range it is necessary to optimize the inventories structure. Resolving the problems with the inventory turnover (days) exceeding the normative range: That's why the inventories management policy must take into account seasonal fluctuations, changes in consumers tastes, peculiarities of the industry and production process, delivery delays, etc. In this case, the production or sales process can be paralyzed. Should be remembered that the ratio value happens to be too low. Overall, the faster is the period of one turn of the company's average inventories, the more efficient its inventories management is. Source: Almanac of Business and Industrial Financial Ratios Religious, Grantmaking, Civic and Professional Organizations Normative values of the inventory turnover (days) for different industries look as follows: IndicatorĮlectric Power Generation, Transmission and Distribution To estimate the efficiency of the company's efforts in this area more precisely, it is reasonable to compare the value of this ratio with the major competitors. It means that less funds are being distracted to form the inventories. The decline of the inventory turnover (days) value during the year is a positive trend for the company. The ratio can be computed by multiplying the company's average inventories by the number of days in the year, and dividing the result by the cost of goods sold. It indicates how many days the firm averagely needs to turn its inventory into sales. Inventory Turnover (Days) (Days Inventory Outstanding) – an activity ratio measuring the efficiency of the company's inventories management.
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