Most sellers dream of their business going viral, and for good reason. More buzz around your company translates to more clicks, more eyes on your products, and more money in your pocket at the end of the month that you’re able to use to funnel back into your site and make it even better. But there this can also signal trouble. While it’s fantastic when there’s new customers clamoring for your merchandise, merchants often struggle to handle rapidly mounting or sudden demand, or be unsure how to transition people affected by the fervor of momentary trends into long-term buyers.
One of the things that will frustrate potential customers more than anything else is products being out of stock, especially over long periods of time. A shop afflicted by various “out of stock” messages is a shop that’s viewed as unreliable or not worth ordering from by many potential customers. Thankfully, there’s a number of tried-and-true methods of managing your stock, including inventory turnover calculation. Read on to discover important inventory turnover definition examples and practical tips for applying it to your own ecommerce endeavor.
First, it might be helpful to describe what we mean when we refer to a shop’s supply. Simply speaking, it’s an account of all the goods a company has in store. Raw materials, works in progress, and finished items all count towards the total. So what is inventory turnover? It’s the rate at which a company replaces stock in a given period of time, due to sales.
The question of how to find average inventory rates is an important one for the savvy business owner because it can be an important diagnostic regarding the health of the company. Low inventory turnover can be a sign that a business is struggling to make sales, or is perhaps in its off-season. High inventory turnover, on the other hand, means that a shop is doing very well, although it may have slight trouble keeping merchandise on the shelves.
The inventory turnover formula goes as follows: Cost Of Goods Sold ÷ Average Inventory. Cost of Goods Sold (COGS) is a measure of the production cost of goods and services, including the price of raw materials, manufacturing, and factory overhead. You calculate average inventory by taking into account fluctuations throughout the year, considering both peak and off-seasons. At that point, you want to run a Days Sales of Inventory calculation by taking the inverse of your number and multiplying it by 365. This tells you exactly how many days it takes to sell out the entirety of your stock.
Once you’ve performed the calculations above, it’s simple math to discover how much stock you go through in any given period of time, whether that be on a weekly, monthly, quarterly, or yearly basis. If it’s a bit low, you’re able to begin looking into how to improve inventory turnover to make sure that you’re keeping a steady pace and making enough revenue for everything to run comfortably. It’s an excellent benchmark from which to make adjustments until you find a set of circumstances and actions that work for you and generate a manageable level of demand.
Your inventory turnover rate can be used to make a number of decisions about your business going forward. We here at P2Pseller believe that the more information you have at your disposal, the fewer unknowns you have to be anxious about. Even if you’re not to the point where you sell out your entire stock in a couple months just yet, we’ve got your back. Through partnering with you and facilitating relationships with our warehousing, logistics, and courier providers, we’ll help you grow your business bigger than ever before and smash sales goals quarter after quarter. Register a free account with us today to browse our offerings without any commitment required on your end. We’re ecstatic for you to join us in the ecommerce and fulfillment revolution.