Inventory turnover
The inventory turnover or stock turnover is one of the parameters used to control the management of the logistics function or the commercial department of a company. Rotation, in this context, expresses the number of times that stocks have been renewed (of an article, of a raw material...) during a period, normally a year.
This value is a good indicator of the quality of supply management, stock management and purchasing practices of a company. A figure cannot be established as it varies from one sector to another: manufacturing companies usually have turnover rates between 4 and 5; department stores aim to reach 8; and hypermarkets can reach 25 in some items in the food assortment.
Concept
Inventory turnover corresponds to the average renewal frequency of the stocks considered, during a given time. It is obtained by dividing consumption (sale, shipments...), during a period, by the average inventory value of that same period.
For example, if a car salesman maintains an average of 10 cars on display in his store and sells a total of 150 vehicles per year, his stock has a turnover of 15. The turnover is calculated by dividing the total sales, in this case 150, between the average inventory, in this case 10.
Inventory turnover is actually reporting the number of times inventory investment is recovered, during a period. In the previous example, the car salesman has recovered 15 times the investment in cars that he made during the year, by selling 150 vehicles, maintaining an average stock of 10.
Calculation
The rotation, or rotation index, IR, is calculated with the expression:
- IR=Sales at cost priceAverage stock{displaystyle IR={frac {text{Sales at cost}}{text{Existences mean}}}}}
- Sales at cost price
- They are the units sold during the period, they can be expressed in physical units or in monetary units; in the latter case, the figure should reflect the cost of sales (or sales at cost), not sales income, as it would distort the result.
- Average stock
- They are the units stored on average during the period, they can also be expressed in physical units or in monetary units, at their value in the warehouse.
The two figures must be expressed in the same unit.
Formula to determine inventory turnover
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Inventory turnover is determined by dividing the cost of goods sold in the period by the average inventory during the period. (Cost of goods sold/Average inventories) = N times.
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Importance
Turnover is an important part of profitability. In shorthand:
- Coefficient of profitability=Margen↓ ↓ Rotation{displaystyle {text{Coefficient of profitability}={text{Margen}}}{text{Rotation}}}}
In many cases, when the margin is tight, the best option to increase profitability is to increase turnover.
Maintaining inventories produces an opportunity cost, since to have them a capital investment must be made, hence the importance of properly determining their size.