What is a Good Inventory Turnover Ratio for Retail?
Retailers are always looking for ways to increase their bottom line by boosting sales and making savings on overheads. But good inventory management can actually be just as effective in boosting your business’ profitability.
What is inventory turnover?
Sometimes referred to as stock turnover, inventory turnover is a measurement of the number of times a given item is sold over a particular period of time. In accounting, inventory turnover is usually calculated by year but it can also be viewed on a monthly or quarterly basis.
Inventory turnover data gives business owners or managers a clearer picture of the overall financial position of the business.
Inventory turnover formula
So, how do you accurately calculate stock turnover? Fortunately, there’s a simple formula that can be used to calculate the turnover ratio.
Cost of Goods Sold (COGS) divided by the average inventory for the year
An example of this formula:
A shoe business sells over $600,000 in items for the year, and they held, on average, $300,000 of inventory.
$600,000 sales divided by $300,000 of inventory = 2
Using this formula we can calculate that this business' inventory turnover is 2. This means that during the year they had to replenish their entire inventory twice. Quite simply, this rate shows that the business is selling products at a profitable rate.
Another example:
A hair supplies store sold $200,000 in products for the year and had, on average, around $500,000 in inventory.
$200,000 sales divided by $500,000 of inventory = 0.40
This business has an inventory turnover rate of 0.40 which indicates that they are spending and holding too much inventory. Not only do they have money tied up in stock that is just sitting on shelves, but they’re also incurring the costs involved in storing the inventory.
What is a good inventory turnover ratio for retail?
The golden number for an inventory turnover ratio is anywhere between 2 and 4.
If the inventory turnover ratio is low, it can mean that there could be a decline in the popularity of the products or weak sales performance. In a lot of cases, the higher the ratio is for inventory turnover, it generally means that your business is performing well and its goals are being met.
With that being said, having an extremely high ratio for turnover rate is not always a good thing. If your inventory turnovers 8 times in a year, it can potentially mean that your stock levels are low and you may be missing out on sales from sold-out products.
Why it’s important to measure the inventory turnover ratio
If you’re not calculating your business’ inventory turnover ratio then you are likely to be missing out on valuable data to help you make more informed decisions.
Inventory turnover is valuable because it is a key performance indicator (KPI) that can help to effectively manage and grow your business. This measurement is also a key indicator that can show banks how liquid your business’ assets are, which can be beneficial if you need to make a loan application.
Having a clear view of stock levels and turnover rates can also help to make more informed decisions about purchasing, merchandising and selling the products that customers want.
This ratio can help businesses make decisions about:
- What items need to be ordered and how much?
- What products may need to be put on sale?
- Preplan orders allowing for lead time?
How to improve inventory turnover
With an understanding of why measuring stock turnover is important, let’s take a look at some ways to improve an inventory turnover ratio.
Use a thorough inventory management system
Firstly, you can’t improve or optimise an inventory turnover rate without having the proper tools to be able to measure it. This is why businesses need to have both an effective POS and inventory management system that can track sales and inventory levels, as well as generate full reports all in real-time.
Not only will an effective POS system that has built-in inventory management allow you to oversee inventory seamlessly, but it will also record sales, figures and report on all other aspects of the business without the need for manual processing.
A good POS Inventory Management System, can automate the vast majority of what would be manual tasks, saving you time and staffing costs.
Other benefits:
- Improves cash flow and reduce overall costs
- Centralises and automates all business data
- Provides easy barcode management
Create ways to sell slow-moving inventory
If you have identified that your inventory turnover is slow, then it may be time to ramp up sales and marketing efforts to try and sell more products.
While there is no one size fits all strategy that can be implemented into retail stores to boost sales, there are some strategies that can help.
Some sale ideas:
- Train staff to upsell items or cross-sell promotions
- Encourage suggested selling
- Set sales targets and incentivise your team to reach it
- Train staff on effective selling techniques
- Review visual merchandising
- Have a time-sensitive sale on slower inventory lines
Proper forecasting
There are a number of varying factors that can impact inventory levels, including seasonal demand, occasional products and trends. Because of this, it is important to remove the guesswork and forecast orders and stock levels based upon yearly and quarterly sales figures.
What’s better, is to closely evaluate sales data and determine the best selling and trending items so these numbers can be built into sales forecasts and budgets.
Effective marketing
Your business' marketing strategy could be a crucial tool in improving inventory turnover rates. Having a proper marketing plan can allow you to focus on items that sell less and reach more customers.
Using all available marketing mediums can help you to grow your business by reaching new audiences and demographics. With an influx of new customers, sales on products can improve which will ultimately improve inventory turnover rates.
Some ways to improve marketing:
- Social media - use platforms such as Facebook, Instagram, Twitter and Tik Tok.
- Have an easy to navigate website
- Email marketing
- Loyalty programs
- Paid advertising
- Have an SEO strategy to improve search results
Smart pricing strategies
Pricing is tricky, especially if your business sells products on a global scale through an ecommerce platform. Most businesses will realise that having a single pricing strategy will not work for every item that is stocked.
Because of this, it is best to adopt a multilevel pricing strategy on inventory that is based on relative factors. These can include:
- Occasional items that have to be sold by a certain time ie. Christmas and Easter supplies
- Seasonal variances
- Shipping costs
- Bulk buy discounts
- Current trends
Improve your inventory turnover ratio with a POS system that can do it all
Your retail POS is the centre of all communication in your retail store. It needs to be fast, easy to use with a robust feature set to help you effectively manage all aspects of your retail business including inventory.
- Easily track and manage inventory levels with our built-in Inventory Management system
- Integrate with over 100+ leading business tools to facilitate better marketing, improved customer loyalty, and simplified accounting
- Accept credit, debit, gift cards, and contactless payments
- Manage your restaurant from anywhere with 24/7 cloud access
