Inventory turnover is a key financial metric used to evaluate how efficiently a company manages its stock of goods. It measures how often inventory is sold and replaced over a specific period. Understanding this ratio is crucial for optimising inventory levels and ensuring a healthy cash flow.

Calculation:
Inventory Turnover Ratio: This ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory during a period. It shows how many times a company’s inventory is sold and restocked.
            Example: 
If COGS is $500 000 and the Average Inventory is $100 000, the Inventory Turnover Ratio would be:
Inventory Turnover = $500,000 / $100,000 = 5
This means the company’s inventory is sold and replaced five times during the period.

Why it matters:
Efficiency indicator: A high turnover rate indicates that inventory is selling quickly, which is often a sign of strong sales and effective inventory management. Conversely, a low turnover rate may suggest overstocking, obsolete products, or weak sales.
Cash flow management: Proper inventory turnover helps businesses maintain a balance between stock availability and cash flow, reducing the risks of tying up capital in unsold goods.
Demand forecasting: Monitoring inventory turnover aids in predicting demand, adjusting purchase orders and optimising supply chain operations.

Improvement Tips:
Accurate forecasting: Analyse past sales data and market trends to predict demand and avoid overstocking.
Efficient reordering: Establish just-in-time inventory systems or automated reordering processes to maintain optimal stock levels.
Product management: Regularly review inventory to identify slow-moving items and discount or discontinue them to free up space and cash flow.

Considerations:
Industry differences: Turnover ratios vary across industries; for example, a mini supermarket store may have a high inventory turnover due to perishable goods, while a furniture shop may have a lower ratio due to the longer sales cycle.
Balance: Striking the right balance between too much and too little inventory is important for maintaining smooth operations and meeting customer demand without excess storage costs.

Monitoring and optimising inventory turnover helps your business stay responsive to customer needs, minimise waste and improve profitability. It’s a critical aspect of effective inventory management that directly impacts financial performance.