Calculate Inventory Turnover Ratio

Tips on How You Can Calculate Inventory Turnover Ratio

Retailers find the counting and management of inventory to be one of the most taxing tasks in terms of time required and man-hours needed. There is always a margin for human error when undertaking this process manually. In addition to this, retailers often find it difficult to understand how to calculate inventory turnover for their outlet. This is one of the most crucial business sustainability ratios, and it should be monitored closely at periodic intervals. In order to ease the process of stock counting and managing the inventory turnover ratio, it is better for retailers to completely integrate the workings of their business with the POS.

POS integration in retail outlets

A retail outlet, whether small or large, now contains a POS at least in the form of a cash register. Unless your retail outlet is one of the smallest in your locality and contains only the bare minimum necessities for the customers, this level of integration with a POS is no longer sufficient.

In order to function effectively and remain competitive, businesses need to use a much more integrated POS. This allows them to implement a more advanced cash management system that will help monitor sales, track inventory, implement loyalty programs for customers, and generate business performance reports.

The need for such an integrated POS is even more pressing in case the business sells multiple categories of products or is in the service-oriented market. It is almost impossible to track inventory in an effective manner by conducting a manual count, in case your product portfolio is more complicated than a single product.

POS integration and its benefit for Inventory Management

A business can suffer serious damage to its profitability whether it carries excess stock or too little inventory, leading to frequent stock outs. The possibility of such errors is higher when a business is counting and managing its inventory manually.

This necessitates the need for complete POS integration that manages your business’s inventory in an automated manner. The integration provides much-needed stability in terms of sustained profitability, since money is not lost due to mismanaged inventory.

A POS that tracks your inventory allows you to evaluate your overall sales, along with singling out your top-selling and least-selling items. This helps you plan your future purchases that would be tailored to your customer base.

Once your inventory is managed through an integrated POS, any losses due to theft or administrative errors (shrinkage) are minimized to a great extent. Shrinkage is one of the most underestimated factors that can impact the profitability of a retailer. It reduced the profitability of retailers at a national level by $46.8 billion in 2018 in the U.S.

You will also be able to generate any sales reports at the click of a button to track business performance on a periodic basis. One essential that retailers tend to track regularly is the inventory turnover ratio.

Integrated cloud-based systems allow you to have access to every information of your business, irrespective of your location or the device being used. You do not need to be in a specific location or be wired to a particular system to review your business’s performance. You can do so by accessing your cloud-based POS, even on your phone.

POS and Inventory Turnover Ratio

If the manual counting and tracking of inventory is a tedious task, the calculation of the inventory turnover ratio is an even more complicated one. The count of inventory to use when calculating this ratio or the accounting standards applicable in your country are some of the factors that impact the value of this ratio. Given that you can have the required support from your POS if it has been integrated completely with your retail transactions, you should not be wasting your time doing this manually.

As a retailer, the only thing you would have to do is fill in the details about the periodicity of calculating this ratio for your outlet and the accounting standards applicable in your vicinity, and let the POS do the rest.

The inventory turnover is primarily a reflection of how frequently your business replaces inventory due to the sales. However, the inventory turnover ratio shows how well a retailer generates sales from its present inventory. If this ratio is at the required level or above it, it is reflective of business productivity and high demand for your products. Similarly, a low value for the same means there is a declining demand for your products, and you need to rethink your product portfolio.

A very low inventory turnover means that you overestimated the demand for your products and ordered excess stock of products. Similarly, a very high inventory turnover ratio is indicative of high stock-outs and underestimation of demand for your products.

However, it is always better to monitor the trend of its values over-time and against industry standards to get a better idea of your business’s performance.

As a retailer, if you want to know how to calculate the inventory turnover ratio you can use the following formula:

Inventory Turnover ratio: Cost of Goods Sold/ Average Inventory

An integrated POS will allow you to track this integral ratio with detail including but not limited to the product name, product description. Category, cost price, retail price, barcode, available quantity, and supplier name.

These details along with the inventory turnover ratio can help you plan and realign your sales strategy if needed. For example, for a product that has a low inventory turnover ratio, you can put up offers to get to increase its sales. If a particular product is moving faster than anticipated and has a high inventory turnover ratio, you should alter its periodic ordered quantities.

Retail outlets can suffer heavy losses when money is tied up in unused inventory or customers shop from another outlet due to stock-outs. Having a cloud-based POS will not only save time lost in counting stock manually, but also help in retaining customers and remaining sustainable over time.