Inventory Turnover

• Inventory turnover is an efficiency ratio
• What is inventory turnover?

  How many times does a business replace its inventory each year
• How do you calculate inventory turnover?

  (Cost of sales)/(Average inventories held)
• Where can you find the average inventories held figure?

  Balance sheet
• If a business has cost of sales of £200,000 and their average inventories held are £40,000 what is the business' inventory turnover?

  5 times
• What does inventory turnover show?

  How efficiently a business is turning their stock into revenue
• Does a business want a higher or lower inventory turnover?

  Higher
• If a business has a high inventory turnover what does that mean?

  The business is quickly converting stock into sales
• Why is it good for a business to have a high inventory turnover?

  Less cash tied up in inventory so they are financially efficient
• How can a business achieve a high inventory turnover?

  By using just in time (lean production)
• Why is a reducing inventory turnover bad?

  • Stock is not selling which means there could be a marketing issue
  • Stock could become out of date and obsolete
• Would a restaurant have a high or low inventory turnover?

  High
• Why would a restaurant have a high inventory turnover?

  Resaurants hold food which can perish or go out of date quickly
• If a business uses just in time production do you expect them to have a high or low inventory turnover?

  High
• If a business has a narrow product range do you expect them to have a high or low inventory turnover and why?

  High because the business would have lower average inventories held
• If a business has a wide product range do you expect the to have a high or low inventory turnover and why?

  Lower because the business will most likely have more average inventories held
• Why might a high inventory turnover not always be good?

  • Stockouts
  • Due to lower prices which could reduce the business' gross profit and operating profit margin