![]() Money is saved (and put to better use) in a variety of ways, not just in terms of writing checks for smaller amounts. Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year.Ģ) You’ll increase efficiency, reduce human error and save time. Rather than tying up your cash in carrying costs and actual inventory, allow your money to go towards other aspects of your business, and commit only exactly what you need to inventory and only when you need it. As noted above, an unbalanced inventory ratio can mean ordering excess inventory when it isn’t needed or lacking the inventory necessary to fill an order when it is needed. As noted by Marcus Lemonis of CNBC’s The Profit, inventory that sits around for years is like “burning money” and “bad inventory management can bankrupt your business.”ģ Benefits of an Inventory System 1) You’ll stop wasting money by balancing your inventory turnover ratio. It’s not surprising, then, that about half of all new small businesses don’t survive past five years.ĭespite these statistics, it appears that many small business owners don’t know how much money they leave on their shelves by not tracking inventory effectively. Unfortunately, according to the State of Small Business report, an incredible 46% of small businesses don’t track their inventory or use a manual process to do so. Knowing how much inventory you have on hand - and the cost it takes to maintain that inventory - is crucial to running an efficient and profitable business. On the other hand, if your cost of goods is higher but average inventory remains low, you may not have enough inventory in stock to meet the demand created by your business, thus losing valuable sales. Additionally, a low turnover ratio is a bad sign for business because those items sitting on a shelf will deteriorate over time, meaning it will be much more difficult to sell and may, in fact, mean you’ll have to write-down the cost in order to sell those items at all. Impact of Inventory Turnover If your cost of goods is low but your average inventory is high, you’ll have a low inventory turnover ratio which indicates you spend too much on holding costs (rent, insurance, theft, etc.) that can drag your business down. ![]() If your turnover rate is too low or too high, you may have issues with overstocking or with inadequate inventory levels. But what does that term mean? Simple: Your inventory turnover is the cost of goods sold - meaning how much you paid for the materials needed to make your product, rather than the amount your product sold for - divided by your average inventory on site. Inventory turnover ratio is one of five key inventory metrics for small businesses. Extraneous costs each month can be the difference between success and failure, which is why every small business owner should know about inventory turnover and how this commonly overlooked ratio can be efficiently managed to turn a loss into a gain or a small profit into a large one. ![]() For many small businesses, the margin of error is small. ![]()
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