Module 2 - Inventory Turnover

Inventory exists for several reasons, but is a Cash Requirement. Companies need to know how efficiently they are using inventory, which is measured by Inventory Turns.

Overview of Inventory

Inventory provides access to materials, parts, products that we need. If it’s in inventory, then we can get it. If it is not in inventory, then it must be gotten from someone else’s inventory or it must be made, and that takes time. But inventory ties up money and takes up space. It must be tracked and accounted for. And sometimes it can be pilfered and it can get old and spoil. These two websites provide a good overview of inventory:

Inventory (2011). Wikipedia, retrieved from http://en.wikipedia.org/wiki/Inventory

Inventory Management (n.d.). Reference for Business, retrieved from http://www.referenceforbusiness.com/management/Int-Loc/Inventory-Management.html

Inventory Turnover

How can you measure the efficient use of inventory?

Consider that owners invest capital into a business which is intended to generate sales. Some of the capital used for inventories. Efficient use of inventory means that you need to invest less of the capital in order to generate sales. So inventory turns is productivity measure for inventory. It is the ratio of Sales generated, usually annually, per the amount of average inventory maintained over that same time period, usually an average of the beginning and ending inventory values. Note that inventory is usually valued at cost and sales are calculated based on price including markup over cost. This resource provides more explanation:

Inventory Turnover (n.d.). BusinessDictionary.com, retrieved from http://www.businessdictionary.com/definition/inventory-turnover.html

The website bizstats.com provides all the financial ratio info you can want, including inventory turns. After you select a specific industry, you will get a table showing a full range of ratios. One of the ratios is Inventory Turns, but this is given in inverse format, Inventory/COGS. So to get the traditional format, take the inverse. For example 12.76% would be 1 / 0.1267 = ~8 turns. Here is the link to the manufacturing industry page with ratios:

Industry Income-Expense Statement (n.d.). BizStats, retrieved from http://www.bizstats.com/corporation-industry-financials/manufacturing-31/show