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Inventory Turnover Ratios for Ecommerce: Everything You Need To Know

Knowing how well you did in historical sales through each quarter makes it easier to plan for the next one. It tells you where you stand in comparison to other ecommerce business owners. It tells you the pace at which your inventory is getting sold, and if at all, you need to liquidate excess inventory. Let’s say your company has a beginning inventory of $7000, and purchases are made of the value of $5000, and you are left with an ending inventory of $2000 for a given period. This means that Alpha was able to sell 25% of its stock of Romeo during the month.

Inventory Turnover Ratios for Ecommerce: Everything You Need To Know

It’s similar to the inventory turnover ratio meaning, but it relates inventory to total sales, not COGS. And it’s typically calculated for shorter inventory periods, like weeks or months. Whereas inventory turnover ratio tends to be used for longer time frames, like quarters or years. Also known as inventory turns, stock turn, and stock turnover, the inventory turnover formula is calculated by dividing the cost of goods sold by average inventory. Suppliers with the lowest prices may or may not be the best choice.

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Minimizing the amount of inventory that can “go bad” means that more resources are available to respond quickly to market trends and new product developments. Another potential cause of your slow-moving inventory problem could be your website. These days, it’s non-negotiable to have an attractive and easy-to-use digital presence, especially if you’re an eCommerce business. There are too many user-friendly digital stores out there for buyers to even consider spending time on a website that’s slow, poorly designed, or confusing to use.

Another way to attract more buyers, especially in apost-COVID world, is to offer your products faster or in a more convenient way than your competitors. Sephora recentlypartnered with Instacartto offer fast contactless delivery to their customers and remain competitive compared to other beauty stores offering curbside delivery.

For people running a retail business, your inventory turnover ratio can be an ideal tool to help you measure business growth. It can also be valuable in making business plans to boost sales. To make it easy, this article introduced inventory turnover, how to calculate it, the healthy inventory turnover ratio you could consider, and why it is important. By going through this article, no doubt you have a solid idea on how to improve your sales which banks on the need for a healthy inventory turnover ratio. If yes, you should always calculate the inventory turnover ratio as it will how your business assets liquidity. This will be highly beneficial when making a loan application.

Low Inventory Turnover

For example, if a competitor’s inventory turnover is 8.6%, it means that Coca-Cola is selling slower than the competition. The inventory Sell-Through Rate represents the percentage of inventory you sold concerning what you purchased from a manufacturer in a given period, usually 30 days. It is used to estimate how quickly you can sell a product, and therefore whether the product is a good fit for your customers. The closer the Sell-Through Rate is to 100%, the quicker that product is selling.

  • Note that if you receive new supplies infrequently, such as quarterly, then a monthly sell-through rate will drop dramatically after new stock arrives, and give a misleading impression.
  • It’s the most sophisticated of the inventory control systems and allows you to understand current inventory levels down to the smallest detail so you can better understand and manage inventory costs.
  • When evaluating offers, please review the financial institution’s Terms and Conditions.
  • Since inventory is often put up as collateral for a loan, banks want to make sure the inventory is easy to sell and can quickly be turned into cash.
  • In this case, a high inventory ratio and fast stock turnover are both important.
  • It’s a good idea to use it alongside other metrics to get a more nuanced picture.

The “cost” part of COGS includes any cost you incur as a business to acquire, manufacture, or assemble your goods. For a graphic tee business, these costs might include the purchase price for fabric, manhours for sewing/assembling shirts, and ink for printing graphics onto each tee.

It Puts You In A Better Financial Position

With these, you can confidently monitor your inventory levels and make informed decisions to grow your business and streamline operations strategically. In summary, low-margin industries have larger inventory turnover ratios than high-margin industries because they must balance lower profitability per unit with selling volume in larger units. This is arguably the most used metric in inventory management. Its goal is to measure the number of times your inventory is sold within a period of time, typically one year. For example, an annual Inventory Turnover Ratio of 12 means that you churned your inventory 12 times in a year, or every 30 days on average.

Let’s walk through it step-by-step with an inventory turnover equation example. Better still, benchmark your business’ past performance and set future goals from there. Inventory that turns over quickly also increases your responsiveness to customer demands; this is a major concern in fashion and technology. Determine total cost of goods sold from your annual income statement. Determine the total cost of goods sold from your annual income statement.

Inventory Turnover Ratios for Ecommerce: Everything You Need To Know

Once you’ve calculated the ABC inventory analysis for your entire inventory, you’ll easily be able to determine which products deliver the highest value. The products in the A category are the ones you should prioritize in your inventory management. If you’re looking to streamline your operations and raise your bottom line, you need to adopt quality inventory management strategies. With the right plan in place, you’ll reap the benefits of increased efficiency and accuracy — two factors which are invaluable to the overall operation of your eCommerce business. If, however, you have a physical location, your inventory management process may look different.

Is Your Inventory Turnover Ratio High Or Low?

Inventory turnover ratio is a measure that shows how many times a business has sold then replaced their inventory over a set time period. A good rule of thumb is that if your inventory turnover ratio multiplied by gross profit margin is 100% or higher, then the average inventory is not too high. Inventory turnover is a ratio that measures the number of times inventory is sold or consumed in a given time period. It’s important to remember that any time you want to compare your inventory turnover with that of another business, it must be on a level playing field. In other words, there’s no use comparing your retail operation with a business that sells completely different products. By planning your inventory costs with Brightpearl, you’ll be able to generate a highly accurate budget for each of the three aforementioned categories. Planning your inventory in units like this means you’ll be able to estimate more accurately whether or not you have the capacity in your warehouse.

If your apparel store has a stock turn rate of 4.0, it means that your store is quite in line with your industry’s average. On another hand, if your inventory isn’t moving as quickly, then you may need to evaluate your sales, marketing, and inventory practices to see how you can improve. As a retailer, you’re always looking for ways to increase sales and profits, as well as manage the space you have for inventory. There is a delicate balance between having too much or too little stock on hand. Too much inventory leads to high holding costs, while too little stock means possibly missing out on sales. Circuit for Teams can help save time and money on your shipping process. Our routing software can optimize your last-mile delivery — the final stage in the supply chain responsible for getting products into customers’ hands.

If your inventory turnover ratio is low, you need to focus on these five sections within your business. Checking your purchasing and sales reports, you indicated a sale of $55.000 worth of baby socks. You have checked your inventory and saw that you had $20.000 worth of socks at the beginning of the year.

What Is The Inventory Turnover Ratio?

The formula can also be used to calculate the number of days it will take to sell the inventory on hand. Regardless of what time period you’re using, what’s most important is that you’re applying the same dates to your cost of goods sold as you do for your average inventory. Otherwise, you won’t be comparing apples to apples and your inventory turnover ratio won’t accurately reflect what’s happening with your business. Calculating your inventory turnover ratio means you can avoid getting blindsided by slow-moving stock. This is one of the most valuable importance of calculating the inventory turnover ratio in retail businesses.

For distributors, the average inventory turnover depends on your industry. The inventory turnover ratio is a precise figure that represents inventory turnover. This benchmark reveals how quickly your company uses and replaces inventory within a predefined time frame. Ensuring high inventory ratio and maximum financial returns on space owned or rented are crucial for success in the businesses. Apart from the above-mentioned sectors with the highest inventory turnover ratio, other prominent sectors such as retail, healthcare, energy, and capital goods have a ratio below 10.

It is the rate at which an ecommerce company converts its inventory into sales over time, in most cases a year. In simpler words, the inventory turnover rate is an indication to the company if its products are being sold quickly or not. For example, Inventory Turnover Ratios for Ecommerce: Everything You Need To Know you will improve your inventory turnover ratio much faster by concentrating on your best-selling products. The sell-through rate helps identify which products those are, so you can work with your suppliers to have smaller but more frequent orders.

What Are Inventory Management Metrics?

With those numbers on hand, we look at our inventory turnover ratio formula. Knowing your inventory turnover ratio gives you key insights into your business’ performance. A higher inventory turnover ratio indicates a healthy business, while a lower ratio can spell trouble.

With that in mind, offering 25% off or a buy-one-get-one deal to move old inventory can be a worthwhile strategy. And while that example might seem a bit obvious, other products or specific months can be a bit more complicated. Should you order the last round of winter coats before Christmas, or after? Will customers start looking for spring dresses in March or in April? Making the wrong choices when it comes to seasonality can cause you to miss an opportunity with your target market, or to have an excess of inventory lying around into the next year. And with the drastic changes in weather patterns we’ve seen in recent years, even the largest of mega-retailers can find themselves missing the mark.

It’s an appealing management strategy for eCommerce start-ups or businesses that are unable to hold a large volume of stock due to capacity or cash flow restrictions. Overall, businesses want to keep their Inventory Turnover Ratio as high as possible, respecting their sales strategy and supply-chain limitations. A high Inventory Turnover Ratio means more efficient inventory management, which results in less capital deployed to run the business. Another very important reason to keep low inventory levels is that this reduces the risk of keeping obsolete/expired products and improves the speed at which you can respond to customer demands. Inventory turnover is a term that shows business owners the number of times they sell their products over time. Normally you calculate the inventory turnover ratio in terms of years. However, many businesses also calculate it monthly or quarterly.

Calculating Inventory Turnover Ratio For Your Business

Adopting a just-in-time inventory strategy can help you trim a substantial amount of your carrying costs, but at the risk of increased stockouts. This number means that, within a year, the sock retailer turns over its inventory around 2.3 times.

You’ll also need to total the cost of labor and resources used to manage inventory. The price of excess inventory can be deadly to an eCommerce business.

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