How stock rotation rate works

As an online brand or eCommerce company inventory is your most important asset and the inventory turnover rate shows how quickly you turn it over. Before we get into how you can improve your inventory turnover rate, let's start by reviewing how to calculate it. The formula looks like this: cost of goods sold / average inventory. 

Let's take an example. Over a year, you sell 500 packets of coffee. On average, there are 100 packets of coffee in your warehouse during the year. 500:100 = 5, so a ratio of 5:1. 

The cost of goods sold(COGS) is typically found in the company's inventory software, or else in the income statement and balance sheet. If it is the latter, take the inventory value at the beginning of the year + purchases - inventory at the end of the year. 

Average inventory is calculated by looking at the balance sheet and taking the inventory at the beginning of the year + the inventory at the end of the year / 2. 

It is also possible to take a shorter period than a whole year. In the accounting software you use, such as Fortnox, you can print a profit and loss account and a balance sheet for any period. 

Once you have the average sell-through rate, you can also easily calculate the average time it takes to sell the stock by dividing the number of days in the year by the ration. In the case above, this is 365 / 5 = 73 days. 

So, what is a good stock turnover rate? The sad answer is that it depends. But in general, higher is better than lower, as it suggests:

  • strong sales
  • lower cost to hold inventory
  • less capital tied up in inventory (which means more freedom to invest the money in other things such as marketing, product development, salaries, etc.).

At the same time, too high a turnover rate can mean that there are too few products in stock. 

What is a good value depends on the industry you are in. For example, in the fashion industry, a common perception is that 4 to 6:1 is a good turnover rate. 

So how can you improve stock turnover rates?

  • Think about pricing. Can it be optimised to turn over the goods faster? 
  • A campaign can always boost the rate of stock turnover. But think about your ROI as profitability goes down. 
  • Adjust the purchase frequency. The more often you buy smaller orders, the less you will have in stock. But be vigilant about how this affects your relationship with suppliers and what it means for logistics costs. 
  • Compare products in stock. Which products sell faster and better? By focusing on the right products, inventory turnover rates can be improved. 
  • Keep track of the trend over time, preferably week by week or month by month, to identify any deviating patterns. 

Extending payment terms using a solution like Waylogs is one of the easiest ways to cover the gaps in your company's cash conversion cycle. By paying suppliers on your behalf and deferring payment between 30 and 120 days, Waylogs' customers have room to spend working capital on critical day-to-day costs instead.   

Cash flow is about using the right resources at the right time. Developing the perfect strategy is not easy. Having access to different tools is essential to be prepared to quickly respond to unexpected business challenges.

Contact Waylog →
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