Therefore, finding an effective inventory management solution is essential, and the inventory turnover index is the key to this problem.

What is inventory turnover?

Inventory turnover is an index that measures a business's ability to manage inventory throughout its entire production and business operations. This index represents the number of times a business sells or replaces inventory in a given period of time. Businesses often use the inventory turnover index to compare the ratio of goods sold and the amount of goods imported into the warehouse, thereby evaluating business performance and identifying ineffective items for timely adjustment.

The most standard inventory turnover formula

The inventory turnover index helps businesses understand the ability to sell or replace inventory in a certain period of time.

Inventory turnover formula:

Inventory turnover = Cost of goods sold / Average inventory value

Cost of goods sold: Is the total direct cost to produce a product, including raw materials, labor costs, and related or arising costs in the production process.

Average inventory value: Calculated by the average cost of the amount of goods in inventory at the beginning and end of the period in the same cycle.

Example of calculating inventory turnover

Suppose that company A produces ceramics and in 2022 has a total cost of goods sold of VND 800 million. The average inventory value of this company in the same year is VND 40 million.

Apply the formula:

Inventory turnover ratio = 800,000,000/40,000,000 = 40

This shows that company A has turned over its inventory 40 times in 2022.

Calculate the number of days to turn over inventory

To determine the average time required for each turnover, we use the formula:

Number of days in the year/Number of inventory turnovers = 365/40 = 9.125

This result means that company A needs to import new goods approximately every 9 days. From this index, enterprise A can plan appropriate import of goods, helping to maintain inventory at an optimal level, ensuring supply and promptly meeting market demand.

Subjects interested in the inventory turnover ratio of the enterprise

Banks that finance capital: Banks are interested in the business situation of the enterprise to assess the financial stability. They need to know how long it takes to convert assets into cash and whether the enterprise has enough resources to pay principal and interest on time.

Shareholders, capital contributors and the board of directors: These subjects are interested in the effective use of investment capital. They want to know if there is a situation of capital stagnation in inventory, affecting the profitability of the enterprise.

Board of control, board of directors and business department: These people need to assess the current situation of the enterprise to take timely measures to improve operational efficiency, especially in inventory management.

Future investors: Investors want to determine the value of a company through financial indicators, including the inventory turnover index, to make the right investment decision

Factors affecting inventory turnover in production

Purchase demand

Customer consumption determines the amount of goods that a business sells or keeps in stock. When products cannot reach the right customers, inventory will increase. High market demand will increase the inventory turnover index, while low demand will lead to large inventories, causing risks for the business. Therefore, in addition to production plans, businesses need a strong marketing strategy to promote products to the market, thereby improving the inventory turnover index.

Purchase trends

Seasonal purchasing trends also have a big impact on inventory turnover. During the holidays, demand often increases. Businesses need to predict this trend to prepare reasonable sources of goods, ensuring that goods are always available to meet market demand in all circumstances.

Sales method

If customers know about the product but are not encouraged to buy more, the inventory turnover index will be low. Businesses need to attract customers to increase order value, and at the same time train professional sales teams to boost sales, thereby optimizing inventory turnover and maintaining a steady flow of goods.

Monitoring cycle

For newly started businesses, calculating inventory turnover in short cycles such as monthly and quarterly helps to closely monitor and effectively control the consumption level of goods. This approach ensures that businesses respond promptly to any fluctuations in market demand, optimize inventory and improve business efficiency.

The Importance of Inventory Turnover in Manufacturing

In manufacturing, one of the important criteria for evaluating business performance is the amount of inventory. Inventory turnover reflects the business's sales capacity, the level of meeting market demand and sales efficiency. Thereby, managers can identify backlogged items, promptly propose solutions to recover capital and minimize financial risks. Therefore, inventory turnover is an important indicator to evaluate the efficiency of a business's production activities.

Benefits of Inventory Turnover Ratio

The inventory turnover ratio allows businesses to compare inventory management capabilities over years or periods. If this ratio is high, it means that goods are rotated quickly, showing effective import and export activities and low inventory risks. On the contrary, slow inventory turnover signals a large amount of inventory, potentially leading to losses due to increased storage and depreciation costs.

How to optimize inventory turnover

• Optimize raw material costs: Negotiate better prices with suppliers to reduce input costs.

• Forecast market demand: Build a plan to predict product demand, prepare appropriate quantities of goods to meet timely demand.

• Increase purchasing demand: Implement advertising strategies, promotions and discounts to stimulate demand.

• Classify goods: Divide fast-selling, slow-selling, high-priced, low-priced goods for better management.

• Adjust the monitoring cycle: In the start-up phase, it is recommended to apply a short monitoring cycle (week or month); when stable, you can choose a longer cycle (quarter or year).

In addition to the above methods, businesses can apply smart warehouse management technology to optimize production processes and inventory management, improve business efficiency and minimize risks.

Through the article on inventory turnover that Intech Group shared above, we hope to help your business manage inventory indexes well and maximize profits. If you need software to help manage inventory and manage business assets effectively, please contact Intech Group via Hotline 0966.966.032 - 0986.448.456 for support and enthusiastic advice.