How to Calculate and Increase Your Inventory Turnover Ratio

Being a professional retailer means greater than figuring out methods to promote the best merchandise to the best prospects. It’s worthwhile to be an skilled in inventory management as properly—and it is advisable to know methods to marry gross sales and stock to optimize your corporation.

That’s the place figuring out your stock turnover ratio is available in. Figuring out this quantity can inform how you propose your buying, the way you promote your items and extra.

On this information, we’ll cowl:

What’s stock turnover ratio?

Inventory turnover ratio is a method of measuring what number of instances you’ve offered via and changed your stock in a given interval—what number of instances it’s turned over, in different phrases. Figuring out your stock turnover ratio provides you key insights into your corporation’ efficiency. A better stock turnover ratio signifies a wholesome enterprise, whereas a decrease ratio can spell hassle. 

Holding on to stock for a very long time is dangerous for enterprise. In the event you’re not promoting your inventory, you’re not bringing in income to cowl your working prices, flip a revenue and—crucially—purchase new inventory. As stock turns into dusty, lifeless inventory, it holds you again from investing in new merchandise prospects could be eager about. Finally, you stand to be left behind by your rivals.

Calculating your stock turnover ratio means you’ll be able to keep away from getting blindsided by slow-moving inventory. You may measure the well being of your corporation, check out the impacts of recent promoting methods, regulate your pricing and reassess your buying methods as wanted as an alternative of ready to react after it’s too late.

It is very important notice that some industries will see extra stock turns than others just by the character of the merchandise which might be being offered. Attire and perishable items, for instance, will flip sooner than vehicles; quick trend will flip sooner than luxurious trend. 

Learn how to calculate stock turnover ratio

There are two methods to calculate stock turnover ratio: by utilizing your gross sales or your value of products offered (COGS).

In the event you use your gross sales, the formulation appears like this:

Gross sales / Common Stock = Stock Turnover Ratio

Utilizing your value of products offered to calculate your stock ratio can be more accurate. Gross sales figures embrace a markup, which can inflate your ratio and provide you with a better quantity. 

You probably have your value of products offered readily available, you need to use that quantity as an alternative of gross sales.

In the event you use your value of products offered, the formulation appears like this:

Value of Items Bought / Common Stock = Stock Turnover Ratio

Both method, you’ll have to know your common stock. You may calculate that by utilizing this formulation:

(Starting Stock + Ending Stock) / 2 = Common Stock

Stock turnover examples

Let’s have a look at an instance to higher perceive. Say we needed to calculate how shortly our attire retailer was turning over its shoe stock.

First, we have to know the price of items offered. We examine our experiences and see that the sneakers offered in a yr had a value of $5000.

Fast tip: utilizing Lightspeed? Discover your value of products offered utilizing the built-in totals report. 

Subsequent, we have to know the price of our starting and ending stock throughout the yr. As soon as we now have that data, we add the prices collectively and divide them by 2 for a complete of $1300.

With these numbers readily available, we have a look at our stock turnover ratio formulation.

5000 / 1300 = 3.8

We turned over our shoe stock 3.8 instances final yr.

Alternatively, if we didn’t need to do the maths ourselves, we may merely run the Turns report in Lightspeed Analytics and discover the sneakers prime degree class. The ratio might be listed on the report.

Calculating days gross sales of stock (DSI)

One other formulation you’ll be able to add to your arsenal to gauge stock turnover is the Days Gross sales of Stock (DSI). Generally known as Days Stock Excellent (DIO) or Days In Stock (DII), it helps you measure the typical size of time your money is tied up in stock and likewise places stock turnover into day by day context.

To seek out your measurement, you’re going to take your year-end stock worth, divide by your COGS, after which multiply by 365 for the variety of days in a yr (Stock Worth / COGS) x 365 = DSI.

For instance, let’s say your end-of-year stock worth is $80,000 and your COGS continues to be the identical $500,000 we’ve used within the earlier examples. In the event you plug these numbers into the DSI formulation, (80,000 / 100,000)365 = 58.4. Which means each 58.4 days your stock will flip. Money is tied up in stock for rather less than two months.

One factor to notice is that no matter the way you select to calculate stock turnover, the vital factor is to remain consistent to ensure you’re comparing apples to apples.

What is an efficient stock turnover ratio?

A better stock turnover ratio is usually higher. A excessive ratio typically tells you that:

• You’re buying sufficient inventory. Your buying funds is about proper and your stock forecasting is correct. You’re buying sufficient to have full cabinets to satisfy demand, however not a lot that you simply’re overstocked.
• Your workers are successfully promoting your stock. Your prospects are responding properly to your gross sales ways and your workers are offering good service.

Nevertheless, it can additionally imply you’re not placing in large enough orders whenever you restock. In case your stock turnover ratio is exceptionally excessive, your prospects could also be steadily working into empty cabinets as they wait so that you can reorder items. Since this may drive prospects away, it’s vital to regulate how typically you find yourself completely out of inventory. 

Fast tip: in Lightspeed, set reorder factors for all of your objects and run the built-in reorder checklist report back to keep away from stockouts. 

You probably have a low stock turnover ratio, you possibly can be coping with a number of of the next issues:

• You’ve been overstocking. You’re buying too many models in your orders, and prospects aren’t responding with the identical demand.
• Your stock isn’t resonating with prospects. No matter you’ve acquired on the cabinets—even in the event you don’t really feel such as you’ve overstocked—isn’t what your prospects need from you. They could be going to rivals for his or her wants as an alternative.
• Your gross sales ways aren’t robust sufficient. You could possibly have essentially the most innovative, desired merchandise in inventory… but when your buyer expertise is not any good, you threat shedding gross sales.

Evaluating your stock turnover by trade

What precisely is a low or excessive ratio varies by industry. Trend retailers common between 4 to six turns, for instance, whereas automobile dealerships common a decrease 2 to three—however automobile parts can have turnovers as excessive as 40. After getting your ratio, analysis your trade’s common variety of turns to match your self to the competitors. 

Learn how to enhance stock turnover in your retail enterprise

In case your stock turnover ratio is decrease than your trade’s common, you’ll have to take motion.

Regulate your buying plans

Get your inventory so as with correct inventory forecasting. 

Examine the turnover ratio of assorted classes to their gross sales figures and see the place you possibly can begin ordering much less. If gross sales of a specific product or class have began to drop off, you possibly can mix ordering much less of them with bringing in new merchandise which might be extra in keeping with your finest sellers.

Assessment your pricing methods

Pricing can drive prospects away, even when the standard of the merchandise and their experiences land. In case your gross sales aren’t robust, you possibly can contemplate implementing among the following pricing strategies:

• Bulk pricing: that is the place prospects lower your expenses based mostly on what number of models they purchase (1 for $3, 2 for $5, 3 for $7, and so forth).
• Seasonal reductions: in case your retail enterprise has a seasonal edge—attire seasons, for instance—begin discounting incrementally earlier within the season. As an alternative of getting blowout finish of season gross sales the place you attempt to transfer a whole lot of stock at steep reductions, begin with a lot smaller reductions about midway via the season and enhance the low cost from there.
• Bundle pricing: like bulk pricing, prospects get extra whereas paying much less. Right here, although, you bundle totally different objects collectively to maneuver inventory. It’s very like upselling, however with among the gross sales legwork already finished in the event you make the product bundles your self. 

Attempt new gross sales ways

You may enhance weak gross sales by making buying with you thrilling. Past simply promoting merchandise, your workers could make your retailer a memorable model that prospects need to preserve coming again to.

Contemplate taking personal shopper appointments. You don’t have to be a luxurious items retailer to provide your prospects a white-glove expertise. Appointment buying will be finished throughout common hours or after hours, in-person or on-line via video calls. It provides prospects a extra intimate buying expertise, which supplies your workers with extra probabilities for upsells.

Wholesome enterprise from increased turns

Your stock turnover ratio is a crucial KPI that you have to be keeping track of. Consider it because the canary in your retail coal mine—if it begins to drop, you already know there’s essential work to be finished optimizing your buying and adjusting your gross sales ways.

Managing retail stock? That’s what we do finest. If you wish to chat about how Lightspeed’s built-in experiences and instruments may aid you change into a list administration and forecasting wizard, get in touch.