![]() Attract investors: This is a key metric that is presented to the prospective investors so that they can make a sound investing decision.This helps in executing the planning in a better manner that gives higher results. Forecasting: It can be used to monitor whether or not a company will meet its budgeted target as it can help in monitoring the during-the-year ratio and help in formulating strategies for the residual year to achieve the desired results.It could also signal that market research is in order to review the competitive landscape because there might be a better product in the market launched by a competitor that has captured some of the company’s market.Īdvantages and Disadvantages of Inventory Turnover Ratioīelow are the points on the Advantages and disadvantages: Advantages ![]() Time Series Analysis: If the company’s ITR suddenly starts to decline, it could tell that the company needs to upgrade its product line or range because the consumers are not buying the product as they were before.A lower ratio would tell that the company is not doing something right and can help in identifying why the profits of the company are lower than expected. Comparative Analysis: The peer group analysis may tell whether the company is managing the inventory efficiently or not so efficiently in comparison to its competitors.Further, it may even signal obsolescence. Keeps an eye on the Efficiency of the Company: If the ratio is high it implies that the company is efficient in selling what it is producing but if the ratio is low, then it could point out to overstocking situation or an inefficient sales and marketing effort.Had the denominator been higher than the numerator, it would mean an inventory pile-up or lower efficiency in the management of the same, which would need to be investigated further to find out the causes and rectify them. Inventory Turnover Ratio = $97,000.00 / $36,500.00Īs the inventory turnover ratio is greater than 1, it implies efficient management of inventory in the company. ![]() Inventory Turnover Ratio = Cost of Good Sold / Average Inventory It might be the case that the product is no longer desired by the consumers as it has become obsolete and therefore will become a liability for the company if it sells it for lower price or doesn’t sell it at all If the turnover is low, it means that the inventory is piling up in the company and that implies too much money being blocked in the same. If the turnover is high, then we can assume that the product is not about to get obsolete. Turnover stands for the number of times we rotate a particular aspect of the business, therefore inventory turnover makes inventory the center of attraction and shows how many times the inventory comes in and goes out in a given period of time as a symbol of the efficiency of the company and the demand for the product. The ratio is abbreviated as ITR for convenience.Ī product that is in high demand will have a very high inventory turnover ratio and the ratio also suggests how quickly the inventory is being sold.
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