The coefficient of inventory turnover is an important indicator reflecting the level of efficiency of warehouse management. Understanding index rotation inventory will help businesses control of goods more efficient. In this article Accnet will work with you to find out details about the role, the formula to calculate this coefficient in business activity.
1. The coefficient of rotation what is inventory?
The coefficient of inventory turnover (Inventory Turnover Ratio) is an indicator of important financial help businesses measure the ability rotated inventory into revenue in an accounting period certain. This coefficient reflects the frequency of goods to be sold/used in production
According to the accounting standards in Vietnam VAS 02 - "inventory" system of inventory turnover is an important indicator that helps businesses evaluate the effectiveness of the management of goods in warehouse, optimize costs, enhance operational efficiency.
Index rotated inventory is calculated based on the relationship between cost of goods sold (COGS) and inventory average. This is an important indicator for the business of inventory, particularly in areas such as manufacturing, trade, retail.
2. Formula for calculating the coefficient of inventory turnover
2.1. The calculation formula of the number of revolutions inventory
| The coefficient of inventory turnover = cost of goods sold (COGS)/inventory average |
In which:
- Cost of goods sold (COGS): Is the total of direct costs related to the production of goods/services that the business has sold during an accounting period certain. The price of capital includes costs such as raw materials, direct labor, the cost of production.
- Inventory average: calculated by taking the average of the inventory at beginning of year and end of the period.
| Inventory average = (inventory, beginning of the period + inventory end of period)/2 |
2.2. For example, detailed calculations
Suppose company X operates in the field of retail have the number of documents in the following in the financial year:
- Cost of goods sold: 2 billion VND.
- Inventory, beginning of the period: 400 million VND.
- Inventory end of period: 600 million VND.
Inventory average = [(400 + million 600 million)]/2 = 500 million (VND)
The coefficient of inventory turnover = (2 billion)/(500 million VND) = 4 times
This means that company X has been around his inventory 4 times in years, corresponding with the entire inventory has been rotated 4 times.
2.3. Results the coefficient of inventory turnover in the different branches
Here are some indicators rotation average inventory in the industry:
- Retail industry: index rotation inventory generally higher, ranging from 5 to 10 times of the year.
- Manufacturing: For the heavy industry/manufacturing goods, the coefficient is usually lower, ranging from 2 to 5 times of the year.
- Service industry: Due to no inventory material, this coefficient is not applied directly, but can be replaced by other indicators such as rotation of working capital.
3. Role of inventory turnover for the business
Here are the main roles of inventory turnover for the business:
- Reviews effective inventory management: high coefficient of reflection goods rotated fast, reduce storage costs, items in the backlog.
- Optimization of cash flows: goods sold fast help increase cash flow, reduce financial risk.
- Minimize the risk warehousing: high coefficient helps to avoid damage, obsolescence, reduce costs of storage.
- Support plan: regulate The production, import goods fit with the market demand.
- Improve competition: respond quickly to market changes, to meet the requirements of customers.
- Forecast demand more accurately: Help prepare the goods in time for the peak season.
- Compare with competitors in the same industry: Help to adjust the strategy to enhance performance.
4. The factors that affect the coefficient of inventory turnover
- Industry business: industries such as retail (fmcg) often have the revs high, while manufacturing (durable goods) have lower coefficient due to the long sales cycle.
- Strategic warehouse management: Apply the method of Just-in-Time (JIT) or use software to manage warehouse modern help increase the multiplier by reducing the inventory is not necessary.
- Strategic purchasing and demand forecasting: Forecast accuracy, purchase according to the needs help maintain inventories reasonable, increasing the coefficient of rotation.
- Seasonality: The industry is seasonal, usually have the volatility coefficient due to hoarding goods before the peak, slow consumption during low points.
- Scale business/products: small Business capable of rotation orders faster, while big business with warehousing complex usually have low revs more.
- Economic cycle: When the economy grows, demand increases, the coefficient of rotation increases. In contrast, recession can reduce the coefficient of due to reduced consumer demand.
- Supply chain management: supply Chain efficiency helps reduce the amount of inventory needed to keep increasing the speed of rotation of goods, improve the system of rotation.
5. Optimizing the number of revolutions inventory with warehouse management software lacviet
The coefficient of inventory turnover reflects the effect of rotation goods, directly affects the cost of storage, the cash flow of the business. With management software inventory, Lac Viet, the business will have in your hands optimization tools, this coefficient.
Software provide feature to track inventory in real time automatic alerts when the cargo backlog for too long or deficiency, support demand forecast accuracy.
Thanks to them, the goods are always rotated efficiency, reduced costs of storage, increase cash flow, improve the ability to meet the market. Vietnam to help businesses capture, optimal index rotation easy inventory, efficient, accurate.
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Thank you for taking the time to learn about the coefficient of inventory turnoverthe importance of it for business operations. I hope the knowledge will help you understand more about how to manage warehousing effective, apply the appropriate solution to optimize the system of rotation, enhance business performance.
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