What can inventory turnover tell you?
Tracking inventory turnover can help you uncover inventory trends, sales trends and customer needs by identifying the best-performing and worst-performing products in your business. Having an insight into inventory performance allows business owners to make informed decisions about purchasing stock, pricing products, manufacturing, marketing, budgeting and forecasting.
When looking at what stock turnover indicates about your business performance, it’s important to understand your business model, pricing strategy, marketing efforts and the types of products you sell.
High inventory turnover ratio
As a general rule of thumb, a high inventory turnover ratio is good because it means inventory is being sold quickly. A high inventory turnover can indicate that:
- Sales are strong
- There is a healthy demand for your products
- Stock levels are optimal
- Cash isn’t unnecessarily tied up in holding inventory
Maintaining a high inventory turnover ratio (i.e. selling stock quickly) also reduces the risk of products being unsellable due to spoilage or becoming obsolete.
That said, in some cases, a high inventory ratio can indicate:
- There is not enough stock on hand, which could signal supply chain issues
- Lost sales due to low stock
- Poor customer experience
- Issues with forecasting
Low inventory turnover ratio
On the flipside, a low inventory turnover ratio could indicate:
- Weak sales
- Overstocking
- Ineffective marketing strategies
- Inappropriate pricing
Low inventory turnover is usually not ideal because products can deteriorate the longer they’re stored while incurring carrying costs or holding costs at the same time. Excess inventory also ties up cash, which can have a negative impact on your cash flow.
However, there are exceptions to this. For instance, low inventory turnover might not be a big cause for concern if it’s cheaper to order popular stock in bulk, or your business tends to have seasonal dips throughout the year.
