Inventory management is crucial for any eCommerce business. In fact, just about any eCommerce business revolves around how its inventory is managed. Inventory management is not just about selling items and stocking them, but really more about how well you evaluate your products and, based on that evaluation, how you market them. An efficient inventory process, backed by smart strategy and management, is key.
That is where the concept of inventory turnover comes in. Knowing how to calculate inventory turnover is critical for any online merchant. This guide examines just what exactly inventory turnover is in-depth and explores 10 inventory turnover strategies to help your online business become more efficient!
What is Inventory Turnover?
Inventory turnover is the amount of inventory or stock sold in a given period of time. Knowing a company’s inventory turnover offers useful many insights into what products are selling best and also how the company manages its overall costs.
So, what does inventory turnover mean for your business? If your company has low inventory turnover, it essentially means that you’re doing something wrong! This, in most cases, is either slow or late restocking of products or overstocking on products that don’t sell well. A high inventory turnover means good cash flow, as demand for your company’s products is high.
What is Inventory Turnover Ratio?
An inventory turnover ratio is the ratio that shows how well your inventory is managed by comparing the cost of products sold with the average inventory for a period of time.
This ratio shows how many times a company’s average inventory is sold or “turned” during a period of time, or essentially how many times a business was able to sell its average inventory dollar amount during a year. For example, a business with $10,000 of average inventory and $100,000 in annual sales sold or “turned” its inventory 10 times over.
How Do You Calculate Inventory Turnover Ratio?
Inventory turnover ratio is calculated by dividing the total cost of goods sold for a period of time by the average inventory for that time period.
The formula to calculate inventory turnover ratio is as follows:
Cost of products sold / average inventory = inventory turnover ratio
What is a Good Inventory Turnover Rate?
Generally, a good inventory turnover ratio is between 4 and 6, meaning that you have a well-balanced inventory for sales and restocking of items. High inventory turnover shows that your sales performance is strong while low inventory turnover indicates the opposite.
If your company’s calculated answer is one, that means you sold 100 items in the given time and had 100 in stock. Following the same principle, if you sold 500 items and still have 100 in stock, that means your inventory turnover ratio is five.
The time periods for calculating inventory turnover ratio is usually one fiscal year, though this varies by business.
How to Improve Inventory Turnover
Simply knowing how to calculate inventory turnover isn’t enough. Improving your inventory turnover can make your inventory management much more efficient, cut warehousing costs and boost sales.
Here are 10 strategies to help do just that and a closer look at them below!
- Proper forecasting
- Effective marketing
- Encourage sale of old stock
- Efficient restocking
- Smart pricing strategy
- Negotiate price rates regularly
- Encourage your customers to preorder
- Stock inventory that sells
- Speed up the shipping
1. Proper Forecasting
As any online merchant will tell you, not all products are created equal in terms of popularity! Seasonal items, occasional items and fashion trends all impact your inventory greatly, so keep a vigilant eye out and make your yearly and quarterly forecast depending on this information and your target demographics.
Even more importantly, take a close look at your sales data to see which items are bestsellers and which have been trending higher recently and build this information into your sales forecast and budget for the coming fiscal year.
Inventory automation software is very important for proper inventory management, especially if you’re selling both online and in brick-and-mortar retail at the same time. Many of these tools let you know instantly when a sale is made, with the stock being updated in real-time too. In good inventory systems, automated messages are sent to your distributors as well for restocking. You can essentially manage every process of your inventory through AI, making your business work like a well-oiled machine.
3. Effective Marketing
Having an effective marketing strategy is crucial to improving your inventory turnover. You can focus on products that sell less and reach out to customers that are hard to reach. Reaching out to new markets and using all available marketing mediums will help you to achieve your goal of increasing sales and thus improve your inventory turnover rate. Social media, SEO, paid advertising, content marketing and email marketing are all very effective ways to reach new customers and keep current ones engaged.
4. Encourage Sales of Old Stock
Old stock that’s left over with little demand can burden your inventory. You should avoid such situations at all costs, but if you get stuck in such a situation, offer special discounts and promotions to help move out the old stock quickly. Launching a special marketing campaign aimed at moving outdated stock is also seriously worth considering.
5. Efficient Restocking
Having a robust stock of your most popular items is a great way to keep your sales cycle firing on all cylinders. But efficient restocking in particular is critical.
If you find that an item sells off easily, don’t buy huge quantities of it and overstock yourself. It’s better to stock small quantities of it, but do so more frequently. This is done so that you order new stock before the one you have gets sold, which will keep your business running smoothly and cut down on overstocked, excess inventory. Plus, you can get better rates from suppliers, which can also affect your turnover positively.
6. Smart Pricing Strategy
Pricing can be tricky, especially if you’re selling multiple items on a global scale. A single pricing strategy simply can’t work for all your items at all times. Instead, consider using multiple pricing strategies based on various factors, such as seasonal pricing, free shipping, bulk discounts and the like.
7. Negotiate Purchase Rates Regularly
Ordering smartly can potentially boost your profit margins, so be sure to negotiate rates to get a better deal. Distributors and suppliers tend to give their regular customers better deals and cheaper rates, so if you order regularly, even in small quantities, you may be able to get discounted rates from your suppliers.
8. Encourage Your Customers to Preorder
If you can get your customers to preorder and register for certain products, then you have instant and confirmed sale of your stock. This will increase your turnover, but make sure that the orders you take can be met by your inventory.
To encourage your customers to preorder, smart marketing and products in high demand are typically needed, so try crafting a special sales and marketing strategy around preorders for popular items and see what happens!
9. Stock Inventory That Sells
It’s very important for your inventory turnover and your business in general that you have stock that’s in high demand. Likewise, order minimal amounts of product that sells slowly. A good forecast will help you in deciding which item will sell easily and stock up on in the future. Overall, this is a simple but very effective strategy that too many businesses simply overlook!
10. Speed Up the Shipping
For an online business, fast and reliable shipping can help to enhance sales. If a customer orders online and has to wait for weeks to get a damaged product, then he or she will likely never order again or leave negative comments that could harm your future sales by dissuading prospective buyers. Thus, fast and safe shipping is critical to moving out your inventory efficiently.
Improve Your Inventory Turnover Today
To evaluate your business performance, you need calculated numbers that can be used against industry standards to see where you stand. Inventory turnover is one of them - it will help you know if you’re doing well in terms of sales or not!
There are a lot of important steps that you can take and decisions you can make that can improve your turnover, as a good inventory turnover means that your business is on the right track and is progressing steadily.
Proper marketing analysis, smart promotions, an automated inventory mechanism, favorable purchase rates and efficient restocking are just a few strategies to keep in mind. Timely steps can help you not only boost sales and make your inventory management more efficient, but enhance and expand your business overall.
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