This means the retailer is selling off and replacing its inventory from two to four times a year. A startup, for example, might expect – at least initially – a lower inventory turnover as it introduces a new product.Īn annual inventory turn ratio of 2 to 4 is typically considered good for many retailers. Different types of retailers have different benchmarks for efficient inventory turns. Rather than trying to make inventory turns higher or lower, retailers generally seek to strike a happy medium. That’s not necessarily bad, since it means customers are less likely to find the items they want aren’t available. Lower inventory turns mean stock is moving more slowly. That means the business is spending less on holding costs. In addition to guiding business managers, inventory turn ratios may be scrutinized by lenders when a business uses inventory as collateral for a loan.Ī higher inventory number means stock is selling faster and spending less time in storage or on store shelves. It helps retailers avoid being either out of stock on popular items or having too many items sitting unsold on shelves. Being out of stock on an item when a customer is looking for it means a retailer has missed out on a sale. Being overstocked means the retailer is tying up money used to purchase inventory on slow-moving items. Overstocks also cost retailers money by occupying warehouse space. Inventory turnover ratio is an important tool for two main tasks of inventory management. Couple shopping for a new car at an auto dealership
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