Inventory Turnover Ratio
If you operate a small business, it won’t take you long to figure out that the difference between profit and loss can, in many cases, be minor costs. This is why, as a business owner, you should be aware of the underlying processes that can keep your costs as low as possible whilst keeping your profits high. Inventory turnover is one such metric that is fundamental to small businesses. Unfortunately, a recent State of Small Business report found that a significant 46 percent of small businesses are ineffectively tracking their inventory. This is undoubtedly a factor leading to the high failure rate of new small businesses.
Inventory turnover is essentially the full cost of products—how much you had to pay for your goods, including materials—as opposed to the sell price, divided by the average inventory on your site. Knowing these costs and how much inventory you actually have in stock, is vital for smooth business operation.
Having an automatic inventory system in place is therefore a key component of a successful small business, allowing you to easily track inventory, and save the money you may otherwise lose by not tracking properly.
Balancing an Unbalanced Turnover Ratio
Businesses that have inconsistent turnover will often end up either overstocking, or with insufficient inventory on hand. This can result in loss of profits, particularly with products that have a shelf life. Furthermore, even if the product doesn’t have a shelf life or isn’t going to deteriorate over time, having the company’s cash tied up in inventory can be dangerous in case market prices fall.
If your business has low inventory turnover ratios, it is likely that you have an excess of inventory. This could be a result of low sales or just poor inventory management. It may suggest that you are wasting money on holding costs. Things such as the insurance you are paying on the items, the rent on storage, as well as accounting for theft, all need to be taken into account. Conversely, if the cost of your goods is high but you have a low average inventory, the demand could be solid but you are failing to meet it and are therefore missing out on important sales.
Improve Efficiency and Save Time
Directly balancing your turnover ratio is just one way in which your business can benefit from having an inventory system in place. When a system reduces human error and improves human efficiency, there are layover effects. When employees don’t have to focus their time on menial tasks such as inventory, they are free to maximize their potential in other areas of your business.
Ultimately, if you reduce your inventory inaccuracies and improve your turnover ratio you’ll see an improvement in both profits and business processes almost immediately. Consider streamlining your operations by putting an inventory system in place today.
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