The concept of turnover in the economy is not uncommon. One of the most frequently analyzed economic indicators is inventory turnover.
Inventories are the least liquid short-term assets, therefore, they are exposed to risks to which other working capital is not exposed . Stocks are frozen funds because they represent money that the entity does not use. The vast majority of organizations try to avoid large inventories with reduced turnover. The best way out is to have enough free funds obtained by accelerating turnover.
Excess inventory often leads to excessive costs and lower profit margins. All stocks are a constantly changing value, so for their characteristics calculate the average stock of goods. It is determined in value and kind; in general and for various groups of goods.
The inventory turnover is of several types:
- each individual position in physical terms (by volume, pieces, weight);
- each individual item at a cost;
- a combination of items or a general stock in kind;
- the aggregate of commodity items or total stock at cost.
Inventory turnover is characterized by a turnover ratio. This indicator shows the number of revolutions of the average balance of goods for a certain (reporting) period. This coefficient can be calculated using various parameters and for different time periods, for a set of items or for one item of goods. Often, the turnover ratio is called simply “inventory turnover”. The most popular formulas for calculating the turnover ratio:
- Coefficient of inventories at cost = cost of goods sold for a certain period / average investment in inventories.
- Inventory ratio in physical terms = quantity of goods sold for a certain period / average quantity of inventory for this period.
- The stock coefficient of a position by value = the ratio of the total value of all units sold for a given period of a given position / average investment in stocks for this position during this period.
To calculate this indicator, it is necessary to determine: the average stock of goods and turnover for a certain period, the billing period (week, quarter, month, year).
The inventory turnover for one item in cost and quantity gives the same result, and the set of items in quantity differs from this indicator in value. The reciprocal of the turnover ratio is used to characterize the average balances of working capital attributable to the unit of sale of goods in quantitative and value terms. As a rule, the average duration of the turnover of these funds in days is equal to the ratio of a certain period to the turnover ratio (number of revolutions). The average duration of such a turnover is called the "average inventory in days."
The inventory turnover period in days is characterized by the speed of commodity circulation and the time of one revolution:
Inventory turnover in days = average inventory / value of goods sold.
In working with indicators, the following important points should be considered:
- turnover is calculated only where there are capitalized goods in warehouses;
- those that were not capitalized and are written off from the warehouse are not taken into account in the calculations;
- sold goods that are in stock and not shipped to the buyer are not taken into account;
- stocks and turnover should be calculated in the same quantities;
- analysis of inventory turnover must be carried out in dynamics;
- in each sector of the economy, region, each type of goods has its own turnover standards.
There is one pattern: the higher the turnover of inventory, the less time they are in warehouses and faster again turn into money.