In a commercial or industrial company, inventories represent financial resources immobilized as long as they are not sold or used in production.
A too large stock can weigh on cash flow, while an insufficient stock can cause stockouts and lead to lost sales. Between these two risks, inventory turnover constitutes an essential indicator for measuring the effectiveness of merchandise and raw materials management.
Measuring the speed of stock turnover
Inventory turnover measures the number of times a company refreshes its stock during a given period, generally a year. It is usually calculated by relating the cost of goods sold or the period’s consumption to the average stock.
A high turnover rate means that stocks are renewed quickly. Conversely, a low turnover can signal an accumulation of merchandise, insufficient demand or poorly adapted procurement management.
The indicator can also be expressed in the number of days of stock, in order to estimate the average time during which products remain immobilized before their sale or use.
An indicator directly linked to cash flow
Inventory turnover plays an important role in managing working capital. The longer goods stay in stock, the more the company immobilizes financial resources that could be used for other needs.
A improvement in turnover can thus release cash, reduce certain storage costs and limit risks related to obsolescence or deterioration of products.
However, high turnover is not systematically synonymous with good management. A company that maintains stocks too low can multiply stockouts, delay its deliveries and lose customers.
The objective is therefore to find a level of stock coherent with the pace of sales, lead times for procurement and production constraints.
A performance management tool
Inventory turnover thus allows linking the operational management of merchandise to the financial stakes of the company. Its analysis, combined with other indicators such as the stockout rate, the margin or the average storage time, helps leaders to adjust their purchasing, production and marketing policies.
It ultimately constitutes a simple but strategic indicator: better circulating stocks also means avoiding tying up cash unnecessarily.
