Is 6.2 A Good Retail Inventory Turnover Ratio? Is 8.0 Good?

The weighted-average inventory turnover ratio for all retail is 8.0. Different types of retail businesses have vastly different inventory turnover ratios, though.

What does inventory turnover tell you? What do you do with the information? It can take a company years to determine the appropriate quantity of a product to hold in stock. Too little means your consumers don’t get what they want. Too much means you ‘re wasting precious storage space and your money is not working for you. Without a doubt, your product turnover is indeed a major part of the inventory management process.

Before we delve into the specifics, let’s go over some inventory basics.

What is meant by inventory turnover?

Inventory turnover, sometimes know as stock turn, is a calculation of the frequency of sale of a particular product in one year. In essence, it answers the question – “how many times did you sell all of your inventory?”

Inventory turnover can be measured by item, category, or (most commonly) in aggregate.

It is usually measured annually but can be calculated on a quarterly or even monthly basis too. Why annually? Well, a product is not sold in the same manner throughout the year. There is seasonality. Many products will experience peaks and valleys in sales over the course of a year.

So, measuring inventory turnover annually allows you to get a more comprehensive view of the issue. A comprehensive view of any situation will allow you to make more sound decisions.

What is the inventory turnover ratio?

The inventory turnover ratio is a numerical representation of your company’s inventory turnover.

The formula for calculating inventory turnover describes the sales of a particular item, compared to inventory held, over a specific period.

In simpler terms, it helps you to see how fast each product is selling out. Understanding how frequently every item in stock is sold, can improve your operations in a variety of ways, some of them include:

• Purchasing new inventory
• Storage costs
• Maintaining appropriate stocking levels
• The cash flow of the business
• Storage space occupied by the products
• Comparing your business to a benchmark (competition)

Calculating inventory turnover for retail business

The formula used for determining retail inventory turnover is:

Inventory turnover = cost of goods sold (COGS) ÷ average inventory

The term “average inventory” is noteworthy because, at any specific time, the value of your inventory can drastically change. It can be disproportionately high at one point in the year and disproportionately low at another. Thus, in order to reflect precise and accurate figures, an average is used in the calculation. Using average inventory to calculate stock turn will yield more accurate results.

To be honest, average inventory is approximated. It’s not necessary or practical to figure the average based on day-to-day or hour-to-hour levels. Rather, you can add the beginning-of-year and end-of-year inventory dollar values and divide by two. Alternatively, you can use the highest and lowest month-end inventory dollar values. It doesn’t matter which you use, as long as you’re consistent.

What exactly is a “good” inventory turnover ratio for retail?

A retailer, like every other business, always seeks to grow its sales and consequently its profits. In order to do so, a retailer has to utilize the inventory space it has.

There is a fine balance between having too much product on hand and too little. As mentioned previously, too much inventory is costly. Too little inventory probably means you are compromising on sales.

A good inventory turnover ratio for retail is a subjective thing. It depends. Retail encompasses a lot of different types of businesses. Here’s how I went about answering this question.

First, I found a good article with turnover ratios for different types of retail businesses. Source.

Then, I referenced Census data to find the number of establishments in the U.S. for each type of retail business. Source.

Here’s another post where I write about the valuable information that can be found on the Census website.

Then, knowing the number of establishments for each type of retail business, I was able to come up with a weighted-average inventory turn ratio for retail businesses.

Here’s what that looks like:

In general, you could say that turning inventory over 8 times (7.99 rounded) is average for retail. “Good” might be considered anything above and beyond that.

That won’t really tell you much, however. As you can see by the table, the inventory turnover ratio varies wildly depending on the type of retail business. The range goes from 1.4 for jewelry to 57.5 for baked goods!

If you’re really astute, you’ll probably notice a correlation between the inventory turnover ratio and what the retail business sells. The more durable the products, the lower the turnover. Cost and shelf life also play a part.

So, the real answer to “what is a good inventory turnover ratio for retail?” is “what is the average inventory turnover ratio for your type of retail business?”

But, that comes with an important caveat!

What also must be asked is “how many times did my business stock out and lose sales?”

Because, if you’re losing sales, a high inventory turnover ratio doesn’t mean much.

Be sure to keep things in context.

Interpreting retail inventory turnover

You might think the greater the inventory turnover ratio the better. However, there are some exceptions. You could be purchasing goods in lower than ideal quantities, which will eventually lead to higher shipping costs and out-of-stock goods.

A low inventory turnover ratio can mean poor output from your sales team or a decrease in your products’ popularity. Perhaps your prices are too high. Or, maybe you’re not marketing properly. Whatever the reason – it translates into products remaining too long on your racks. Storage costs can be high, and they continue to pile up as inventory goes unsold.

Why it is important to calculate your inventory turnover?

Maybe you already actively manage inventory turnover and are looking for strategies. Or, maybe you’re new to the concept and are interested in the benefits that management can bring to the business. Either way, if you own a retail store, it’s important that you monitor this metric.

Here are some of the benefits of measuring inventory turnover in your retail store.

You are financially better off

If you are looking for one KPI (key performance indicator) for your business, inventory turnover is it.

The calculation is valuable if you look for financing from banks too. Since inventory is always set up as security for a loan, companies want to make sure that the product is easy to market and can be converted into cash quickly.

You’ll make better business decisions

Closely managing stock turns allows you to make better purchasing choices. Then, you’ll only keep the storage space for the products that are actually selling. Hence reducing your storage costs, which, in turn, allows you to be more flexible on price.

Some of the decisions that can be made using inventory turnover ratio include;

• Which products need to be purchased
  • If the ratio is too high for a specific item, that could be an indicator that a particular product should be ordered more often. Is it stocked out a lot?
• What units must be moved
  • Inventory turnover may indicate when certain products should be given better “real estate” in the store.
• What needs to be scheduled in advance to provide plenty of flexibility
  • By understanding the frequency of an item that turns annually, you can plan better to avoid stockout situations.
• Once you have a proper control over your product turnover, it gets easier to tackle the aforementioned situations quicker
  • You’ll likely develop a system or process that facilitates more efficient inventory management.

As a retailer, it is important to ask yourself whether your products are turning faster or slower than they were last year. If so, why?

Has the expected level of sales changed? Do your inventory management processes need to be tweaked?

Inventory turnover has a huge impact on your retail business

Remember, inventory (no matter what type) is the same as taking cash and placing it on a shelf. If it just sits there, it does you no good.

Inventory turnover is a relatively simple thing to measure and it can have a huge effect on your retail business’s success. If you’re not currently managing inventory turnover in your retail business, consider doing so.