What are Turnover Rates?
Turnover rates are the way of measuring the number of times a business sells stock inventory in a certain time period. The turnover rates are used by businesses for calculating competitiveness and profits. Usually, it is a track of the performance of a business. A high turnover rate in the inventory is mostly seen as positive as it is a sign that goods are being sold before they are damaged or deteriorated.
The most generally used formula for calculating a turnover is:
Turnover = Cost of goods sold /Average inventory
Ways of Calculating Turnover Rates
1. Determine a Time Period for your Calculation
Inventory turnovers are calculated over a specific time period. This time period varies as it can be anything from a fiscal year to an every day basis. The costs of goods that are sold are meaningless when they appear as an instantaneous value.
Once the time period has been decided on for calculating the turnover, calculate the cost of goods that have been sold over that period of time. The cost of calculating the goods sold will not include the amount of money spent on the shipping, distribution, and creation of the products.
2. Utilizing the Formula 365/turnover for Finding out the Average Time Period of Selling the Products
With this operation, you will be able to calculate the estimated time it has taken to sell all of your products that were stored in the inventory. Normally, you find out the turnover on a yearly basis and divide the ratio by 365. The number will be the average calculation of how long it took to sell your products.
3. Divide the Cost of Goods Sold from the Stored Average Inventory
Divide the cost of the goods that have been sold by the number of goods that are still in your inventory. The average inventory is the sum of the beginning value of the inventory balance and the ending value of the inventory balance divided by two.
4. Using the Formula Turnover=Sales/Average Inventory for Quick Estimates Only
Time is a valuable aspect of any business and entrepreneurs often do not have the time to make complicated calculations. This formula saves them time from calculating the turnover rates but, alongside, there is a slight chance of inaccuracy.
The values can turn out to be inaccurate because the inventory is calculated on wholesale rates whereas the goods that are sold are recorded at the prices offered to the customers. This makes the inventory look higher than it really is. It is best advised that you only use this equation to calculate quick estimates.
5. Use the Inventory as an Approximate Measure of Efficiency
Businesses make efforts to clear out their inventory as they have an aim to sell their products as soon as possible. This shows how the business is performing, especially among their competitors. Although the background of the business and the scale it is operating on has to be determined before any of these comparisons can be held, the time period it takes for a business to sell out the products in the inventory proves how well it is performing.
Low inventory turnovers do not always prove to have a negative effect and high inventory turnovers do not always have a benefit. Record every single transaction, including the price of the stocked inventory, every product that is sold, the profit gained, and sale targets in bookkeeping records. This will also help in calculating the turnover rates without having to gather all of the information at the last minute.
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