Inventory turnover is used to indicate how many times a company sells its complete inventory in any given period of time. This measures the briskness of the business.
Inventory turnover formula
Inventory turnover = Cost of Goods Sold / Average Inventory
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
A high inventory turnover may indicate a company that is doing brisk sale. In extreme cases, it may also indicate a company that maintains inadequate amounts of inventory to meet demand, and therefore the company may not be able to keep up with the business.
A low inventory turnover could point to potential problems of obsolescence, overstocking, or ineffectual marketing department.
Many companies try to turn their inventory faster by holding a smaller amount of inventory at any given point of time. If managed properly, this reduces the inventory holding costs for the company (rent, utilities, less spoilage, etc). Many manufacturing companies such as automotive or computers have implemented a Just in Time (JIT) inventory management system where the part comes into the inventory when it is needed in the assembly process. Until then, the inventory may be held by the supplier, often close to the assembly line. This improves the operational efficiency, speeds up the inventory turns, reduces the holding costs, etc.