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Formula
Inventory Turnover Rate = Cost of Goods Sold / Average Inventory
Know your metric
Importance of
Inventory Turnover Rate
Efficiency Indicator
High inventory turnover indicates efficient management of inventory, suggesting that a company is effective in turning its stock into sales without overstocking.
Liquidity Insight
This metric provides insights into liquidity, as faster turnover implies quicker cash generation from sales.
Optimization of Stock Levels
Monitoring inventory turnover helps businesses optimize their stock levels, reducing holding costs and minimizing wastage or obsolescence.
Drawbacks of
Inventory Turnover Rate
Overstocking Risk
Companies might keep lower inventory to maintain high turnover rates, which can lead to stockouts and lost sales.
Not Industry Specific
Optimal turnover rates vary widely between industries, making it difficult to set a benchmark without considering industry specifics.
Quality Overlook
A focus on high turnover might lead businesses to compromise on product quality or variety to keep inventory moving.
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