Stock rotation, or inventory turnover, refers to the frequency with which a firm manages to sell its physical products. Although some authors also define it as the number of times the stock in your warehouse has been renewed, either by sale or for other reasons.
This process is an indispensable part of stock management. It will allow your company to know what is failing in the sales chain and devise new ways to solve it.
How is inventory turnover calculated?
The inventory turnover rate allows the company to know if a product is selling quickly or slowly, which can help avoid future money losses.
To calculate this variable, accountants recommend a very easy formula: Divide the cost of goods sold by the average inventory.
The cost of goods sold is equivalent to the cost of materials for the products plus labor. While the average inventory refers to the sum of the inventory of the first and last month of a given period and divide it by two.
Finally, the inventory turnover rate is: cost of goods sold/average inventory.
The results must be compared with the company’s sales objectives. A low or high inventory turnover rate will depend on the sales goals the company has set for a given period.
Calculate safety stock
Another technique to properly manage your inventory is to calculate the safety stock. In this way you will not only know how the inventory turnover is established or possible in your company, but you will also be able to avoid stock breaks.
Economists recommend the following equation for this calculation: (Maximum delivery time – Normal delivery time) x Average demand.
Bearing in mind that:
- Maximum delivery time: This refers to the maximum time your supplier/s take to supply your warehouse.
- Normal delivery time: This refers to the normal time period in which your supplier supplies you.
- Average demand: The normal average demand for a certain product at a specific time.
By calculating both turnover and security rates, you will be able to know the sales flow of your company. With this you will be able to offer a better service to your customers avoiding stock breakages.
Conclusion
Knowing what the inventory rotation and the security stock is will allow you to increase your sales and consequently your profits. You will avoid losing customers when you have no goods to offer and you will even be able to win new ones.
Keeping track of the movements that occur in your inventory will give you the ability to anticipate future problems in terms of supply from suppliers, distribution of goods, sales and other activities of your company.
Especially when the business starts it is extremely important to control these variables. They will allow you to know in depth how your product behaves in the market and the possibilities of success that your company has.
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