Asked another way, is your inventory tying up precious cash that could be used elsewhere in your business?
As a distributor or manufacturer, it is essential to monitor your inventory turnover ratio, just like you should be doing with your accounts receivable turnover as well.
Here is the formula for calculating your inventory turnover:
Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2)
The rule of thumb for your inventory turnover is this:
- The higher the value, the more quickly your inventory is being converted in cash - and that is a good thing!
Need help in getting your books organized properly so you can track this critical information? Click the contact button below and let's talk further about your situation.
For more insight into the concept of inventory turnover, please visit these resources:
- Effective Inventory Management
- EZ Analytics for Inventory from Acctivate - a perfect solution if you are using QuickBooks to track your inventory.
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