Inventory is often the largest component of a company's working capital. If inventory is not used up by business operations at a reasonable rate, the company will find itself in a situation where a significant portion of its cash is tied up in an asset that is difficult to liquidate quickly.
Accordingly, constantly monitoring the rate of inventory turnover is an important management function.
In all cases, these indicators should be monitored on a trend line to identify a gradual decline in the turnover rate. This ratio can also indicate to management that corrective action is needed to eliminate excess inventory.
Formula
The simplest calculation of inventory turnover is to divide the annual cost of sales by the ending inventory balance.
You can also use average volume in the denominator to avoid sudden changes in inventory levels that may occur at any period end date.
Cost price
goods sold /
Reserves
A variation on the previous formula is to divide the turnover by 365 days, which gives the turnover period in days. This option is more understandable for a non-professional. For example, the phrase “turnover in 43 days” is more understandable than “8.5 turns,” although they mean the same thing. Formula:
365 /
(Cost price
goods sold /
Inventories)
In the previous two formulas, the numerator uses the total cost of goods sold, which includes direct labor, materials, and overhead. However, only direct material costs are directly related to raw material inventory levels.
Consequently, a clearer relationship would be to compare the cost of direct costs of materials with raw material inventories, which gives an indicator of the turnover of raw material inventories.
This ratio can also be divided by 365 days to obtain the inventory turnover period. Formula:
Direct consumption
materials /
Raw materials reserves
The previous formula does not provide a clear relationship between direct materials and work-in-process or finished goods because these two inventory categories also include allocations of direct labor and overhead.
However, if these additional cost items are excluded from the estimate of work in process and finished goods, then there is a reasonable basis for comparing them to direct materials as a valid factor.
Example
A lawn mower company produces an annual inventory management report. The information collected by the CFO is shown in the table.
To calculate total inventory turnover, the CFO performs the following calculation:
CU 4,075,000 / CU 815,000 = 5 revolutions per year
To determine the turnover period, the CFO divides the number of turnovers by 365 days:
365 / 5 = 73 days
The CFO is also interested in the level of raw material turnover when compared to direct materials costs only, using this calculation:
Direct materials costs / Raw materials inventories =
CU 1,550,000 / CU 388,000 = 4 revolutions per year
The next logical step for the CFO is to compare these results with those of previous years, as well as with the results achieved by other companies in the industry.
The result, which is probably not good in any industry, is that comparing direct materials with raw material inventories resulted in only 4 turns per year.
This means that the average material is in stock for 90 days before it is used, which is too long if a reliable production (sales) planning system is used.
Precautionary measures
The turnover ratio can be distorted by changes in the basic costing methods used to allocate direct labor and overhead costs.
For example, if additional cost categories are added to the overhead pool, resource allocation will increase, resulting in a reduction in the reported inventory turnover level, even if the turnover level under the original calculation method has not changed.
The ratio can also become distorted if the cost allocation method is changed. For example, it may change from an allocation based on labor to an allocation based on machine hours, which may increase or decrease the total amount of overhead allocated to inventory costs.
A problem may also arise if inventory valuation is based on standard costs and the underlying standards are changed. In all three cases, the quantity of inventory available will remain the same, but the costing systems used will change the cost of inventory, which will affect the calculation of turnover.
Another problem is that the underlying turnover rate may not reveal the problem of excess inventory. Accordingly, the ratio can be structured so that there are separate calculations for raw materials, work in progress and finished goods (possibly grouped by location). This approach allows you to more accurately manage inventory issues.
The processes of production, circulation and consumption in society occur continuously. But these processes do not coincide either in space or in time. Therefore, to ensure their continuity, inventories are necessary.
Inventory - This is part of the supply of goods, representing the totality of the commodity mass in the process of its movement from the sphere of production to the consumer.
Inventories are formed at all stages of the movement of goods: in warehouses of manufacturing enterprises, in transit, at and at enterprises.
Compliance is achieved through inventory. Inventory in wholesale and retail must serve as a real supply of goods, ensuring their uninterrupted sale.
The need to create inventories caused by many factors:
- seasonal fluctuations in the production and consumption of goods;
- discrepancy between the production and trade range of goods;
- features in the territorial location of production;
- conditions for transporting goods;
- product distribution links;
- opportunities for storing goods, etc.
Inventory classification
The classification of inventory is based on the following characteristics:
- location(in or; in industry; on the way);
- deadlines(at the beginning and end of the period);
- units(absolute - in value and physical terms, relative - in days of turnover);
- appointment, including:
- current storage - to meet the daily needs of trade,
- seasonal purposes - to ensure uninterrupted trade during periods of seasonal changes in demand or supply,
- early delivery - to ensure uninterrupted trade in remote areas during the period between the delivery dates of goods,
- target inventory - for the implementation of certain targeted activities.
Inventory management
Lately, the location of inventory has become increasingly important. At the moment, the majority of inventory is concentrated in retail, which cannot be considered a positive factor.
Commodity stocks should be gradually redistributed between trade levels in such a way that a large share belonged to wholesale trade the following reasons.
The main purpose of creating inventories in wholesale trade is to serve consumers (including retail enterprises), and in retail enterprises they are necessary to form a wide and stable assortment to satisfy consumer demand.
The size of inventory is largely determined by the volume and structure of turnover of a trade organization or enterprise. Therefore one of important tasks of trade organizations or enterprises — maintaining an optimal proportion between the amount of turnover and the size of inventory.
To maintain inventory at optimal levels, a well-established inventory management system is necessary.
Inventory management means establishing and maintaining such a size and structure that would meet the tasks assigned to the trading enterprise. Inventory management involves:
- their rationing - those. development and establishment of their required sizes for each type of inventory;
- their operational accounting and control - is maintained on the basis of existing accounting and reporting forms (registration cards, statistical reports), which reflect the balances of goods at the beginning of the month, as well as data on receipt and sale;
- their regulation— maintaining them at a certain level, maneuvering them.
At insufficient amount Inventory difficulties arise with the supply of goods to the turnover of an organization or enterprise, with the stability of the assortment; excess inventory cause additional losses, an increase in the need for loans and an increase in the cost of paying interest on them, an increase in the cost of storing inventories, which together worsens the overall financial condition of trading enterprises.
Consequently, the issue of quantitative measurement of the amount of inventory and determining whether this value corresponds to the needs of trade turnover is very relevant.
Inventory indicators
Inventories are analyzed, planned and accounted for in absolute and relative terms.
Absolute indicators are expressed, as a rule, in cost (monetary) and natural units. They are convenient when performing accounting operations (for example, when taking inventory). However, absolute indicators have one big drawback: with their help it is impossible to determine the degree to which the size of the inventory corresponds to the needs of the development of trade turnover.
Therefore, more widespread relative indicators, allowing to compare the amount of inventory with the turnover of trade organizations or enterprises.
The first relative indicator used in the analysis is the amount of inventory, expressed in days of turnover. This indicator characterizes the availability of inventory on a certain date and shows how many days of trading (given the current turnover) this inventory will be enough.
The amount of inventory 3 is calculated in days of turnover using the formula
- 3 - the amount of inventory as of a certain date;
- T one - one-day trade turnover for the period under review;
- T is the volume of trade turnover for the period under review;
- D is the number of days in the period.
The second most important relative indicator characterizing inventory is turnover. Until the moment of sale, any product is classified as inventory. From an economic point of view, this form of existence of a product is static (physically it can be in motion). This circumstance, in particular, means that the commodity stock is a changing quantity: it is constantly involved in trade turnover, is sold, and ceases to be a stock. Since inventory is replaced by other batches of goods, i.e. regularly renewed, they are a permanent value, the size of which varies depending on specific economic conditions.
The circulation of goods, the replacement of a static form of inventory with a dynamic form of commodity turnover constitute the economic content of the process of commodity turnover. Inventory turnover allows you to evaluate and quantify two parameters inherent in inventory: time and speed of circulation.
Commodity circulation time - This is the period during which a product moves from production to consumer. The circulation time consists of the time of movement of goods in various links of commodity distribution (production - wholesale trade - retail trade).
Time of commodity circulation, or turnover, expressed in days of turnover, is calculated by the following formulas:
where 3 t.av is the average amount of inventory for the period under review, rub.
The use of the average amount of inventory in calculations is due to at least two reasons.
Firstly, to bring data on turnover recorded for a certain period and inventories recorded as of a certain date into a comparable form, the average value of inventories for this period is calculated.
Secondly, within each set of goods there are varieties with different circulation times, and there may also be random fluctuations in the size of inventories and the volume of turnover that need to be smoothed out.
Inventory turnover, expressed in days of turnover, shows the time during which inventories are in the sphere of circulation, i.e. the average inventory turns over. Speed of commodity circulation, i.e. turnover, or the number of turnovers for the period under review, is calculated using the following formulas:
There is a stable inverse relationship between time and the speed of commodity circulation.
Reducing time and increasing the speed of commodity circulation allows for a larger volume of trade turnover with smaller amounts of inventory, which helps reduce commodity losses, reduce costs for storing goods, pay interest on loans, etc.
The amount of inventory and turnover are interrelated indicators and depend on the following factors:
- internal and external environment of a trade organization or enterprise;
- volume of production and quality of products of industrial and agricultural enterprises;
- seasonality of production;
- import volumes;
- breadth and renewal of the assortment;
- product distribution links;
- fluctuations in demand;
- saturation of commodity markets;
- distribution of inventories between wholesale and retail trade levels;
- physical and chemical properties of goods, which determine their shelf life and, accordingly, the frequency of deliveries;
- price levels and the ratio of supply and demand for specific goods and product groups;
- volume and structure of trade turnover of a particular organization or trade enterprise and other factors.
Changes in these factors can affect the amount of inventory and turnover, both improving and worsening these indicators.
For different products and product groups, the speed of turnover is not the same. The share of product groups with a lower turnover rate is higher in inventory and vice versa. The decision to gradually eliminate slow-selling product groups and replace them with fast-selling ones seems obvious, however, retail enterprises are not very active in getting rid of slow-selling groups for the following reasons:
- there is no opportunity to change product specialization;
- there will be a sharp narrowing of the assortment and range of buyers;
- It is impossible to maintain selling prices at the level of competitors.
This requires systematic control and verification of inventory, i.e. the ability to know and analyze their value at any time.
Methods for analyzing and accounting for inventory levels
In trade, the following methods of analysis and accounting of inventory levels are traditionally used:
Calculation method
Calculation method, in which the amount of inventory, inventory turnover and their changes are analyzed. Various formulas are used to carry out this analysis;
Inventory, i.e. continuous counting of all goods, and quantitative assessment if necessary. The data obtained are assessed in physical terms at current prices and summarized by product groups into a total amount. The disadvantages of this method are that it is labor-intensive and unprofitable directly for the organization or enterprise, since during the inventory the enterprise, as a rule, does not function. Accounting for the physical flow of goods is labor-intensive, but extremely important both for commercial services and for managers of trading enterprises.
The use of two types of accounting (cost and natural) allows:
- identify which product groups and product names are in greatest demand, and, accordingly, make reasonable orders,
- optimize capital investments in inventory,
- make informed decisions to optimize the assortment through the purchase of goods;
Removing residues or operational accounting, i.e. reconciliation by financially responsible persons of the actual availability of goods with commodity accounting data. Moreover, it is not goods that are counted, but commodity items (boxes, rolls, bags, etc.). Then, according to the relevant standards, a recalculation is made, the quantity of goods is determined, which is valued at current prices. The disadvantages of this method include lower accuracy than with inventory;
Balance sheet method
Balance sheet method, which is based on the use of a balance formula. This method is less labor-intensive than others and allows for prompt accounting and analysis of inventory in conjunction with other indicators.
The disadvantage of the balance sheet method is the inability to exclude various unidentified losses from the calculation, which leads to some distortions in the value of inventory. To eliminate this shortcoming, balance sheet accounting data must be systematically compared with inventory records and balances. Using the balance sheet method, it is easy to exercise operational control over the movement of goods. This method is especially effective for automated accounting based on a computer network.
To manage inventory and determine their optimal size, the following are used:
- technical and economic calculations using known formulas, mathematical methods and models;
- constant order quantity system;
- system with a constant frequency of order repetition;
- (S"-S) system.
First group methods is applicable in both retail and wholesale trade. The most well-known method of technical and economic calculations is the sequential determination of the optimal amount of inventory at each stage of product distribution, followed by summing up the results obtained at each stage.
Second And third ways are used primarily in retail trade, as they require constant checks of the availability of goods, which is possible mainly in retail trade.
The meaning of these methods is that in order to bring the amount of inventory to the required level, you should order the same number of goods at any intervals, as needed, or order the required number of goods at equal time intervals.
Fourth method used for inventory management at wholesale trade enterprises.
In this case, two levels of inventory availability in the warehouse are established:
- S" - the limit level below which the size of inventory does not fall; And
- S- maximum level (in accordance with established design standards and standards).
The availability of inventory is checked at regular intervals and the next order is made if the stock level drops below S or S - S."
In trading practice, the amount of inventory that must be held is determined in several ways:
- as the ratio of inventory on a certain date to sales volume on the same date for the previous period (usually at the beginning of the month);
- as the number of weeks of trading for which this stock will last. The initial data is the planned turnover;
- accounting for sales by possibly more fractional product groups. Therefore, cash registers are used in store payment centers, which allow one to take into account the sale of goods according to several criteria.
In addition to the listed methods of managing inventory, there are others, and none of them can be called absolutely flawless. Trade enterprises should choose the one that best suits the conditions and factors of their operation.
Both actual and planned inventories are reflected both in absolute amounts, i.e. in rubles, and in relative values, i.e. in days of supply.
During the analysis process, the actual availability of goods inventory should be compared with the inventory standard, both in absolute amounts and in days of inventory. As a result of this, excess inventory or the amount of non-fulfillment of the standard is determined, an assessment of the state of inventory is given, and the reasons for deviations of the actual inventory of goods from the established standards are established.
Main reasons for the formation of excess inventories of goods may be the following: failure to fulfill turnover plans, delivery of goods to a trade organization in quantities exceeding the demand for them, violation of delivery deadlines for goods, incompleteness of supplied goods, violation of normal storage conditions for goods, leading to a deterioration in their quality, etc.
We present the initial data for the analysis of inventory in the following table: (in thousand rubles)Based on the data in this table, we can conclude that actual inventories comply with the standard. It is necessary to take into account that the planned amount of inventory is in the amount of 3420.0 thousand rubles. was established in accordance with the planned daily sale of goods in the amount of 33.3 thousand rubles. However, the actual daily sales of goods amounted to 34.7 thousand rubles. It follows that in order to maintain the increased volume of sales of goods, it is necessary to have a larger amount of inventory than was provided for in the plan. As a result, the inventory of goods at the end of the year must be compared with the actual one-day sales of goods, multiplied by the planned amount of inventory in days.
Therefore, in the analyzed trade organization, taking into account the increased turnover, there is an excess inventory in the amount of:
4125 - (34.7 * 103) = 551 thousand rubles.
Now let's look at relative indicators - stocks in days (balances in days of stock). The amount of inventory in days is influenced by two main factors:
- change in the volume of trade turnover;
- change in the absolute value of inventory.
The first factor has an inverse effect on the amount of inventory in days
From the last table it follows that the amount of inventory, expressed in days, increased by 14 days. Let us determine the influence of these factors on this deviation.
Due to the increase in the amount of retail turnover, the relative amount of current storage inventory decreases by the amount: 3420 / 34.7 - 3420 / 33.3 = -4.4 days.
Due to the increase in the absolute amount of current storage inventory, the relative value of these inventories increased by 4060/12480 - 3420/12480 = +18.4 days.
The total influence of two factors (balance of factors) is: - 4.4 days + 18.4 days = +14 days.
So, inventories of goods, expressed in days, increased solely due to an increase in the absolute amount of inventories. At the same time, the increase in the amount of retail turnover reduced the relative size of inventory.
Then it is necessary to establish the influence of individual factors on the amount of average annual inventories of goods. These factors are:
- Change in turnover volume. This factor has a direct impact on the amount of average annual inventory
- Change in the structure of trade turnover. If in the total amount of trade turnover the share of goods with slow turnover increases, then inventories of goods will increase, and vice versa, with an increase in the share of goods with faster turnover, inventories will decrease.
- Goods turnover(turnover). This indicator approximately characterizes the average time (average number of days) after which funds allocated for the formation of inventory are returned back to the trading organization in the form of proceeds from the sale of goods.
We have the following values of the goods turnover indicator:
- according to plan: 3200 x 360 / 1200 = 96 days.
- in fact: 4092 x 360 / 12480 = 118 days.
Consequently, in the analyzed one there was a slowdown in the turnover of goods compared to the plan for 118 - 96 = 22 days. When analyzing, it is necessary to establish what reasons led to the slowdown in goods turnover. Such reasons are the accumulation of excess inventory (as in the example under consideration), as well as a decrease in the amount of turnover (this phenomenon did not occur in the analyzed trade organization)
First, you should consider the turnover for all goods as a whole, and then for individual types and groups of goods.
Let us determine by the method of chain substitutions the influence of the listed three factors on the amount of average annual inventories of goods. Initial data:
1. Average annual inventory:
- according to plan: 3200 thousand rubles.
- actual: 4092 thousand rubles.
2. Retail turnover:
- according to plan: 12,000 thousand rubles.
- actually: 12480 thousand rubles.
3. The plan for retail turnover was fulfilled by 104%. turnover is:
- according to plan: 96 days;
- actually 118 days.
Thus, the average annual inventory of goods increased compared to the plan by the amount: 4092 - 3200 = + 892 thousand rubles. This happened due to the influence of the following factors:
- increase in trade turnover: 3328 - 3200 = + 128 thousand rubles.
- changes in the structure of trade turnover towards an increase in the share of goods with faster turnover: 3280 - 3328 = - 48 thousand rubles.
- slowdown in goods turnover: 4092 - 3280 = +812 thousand rubles.
The total influence of all factors (balance of factors) is: + 128-48 + 812 = +892 thousand rubles.
Consequently, the average annual inventory of goods has increased due to an increase in turnover, as well as due to a slowdown in the turnover of goods. At the same time, a change in the structure of trade turnover towards an increase in the share of goods with faster turnover reduced the average annual stock of goods.
Analysis of the supply of goods by individual suppliers, by type, quantity, and timing of their receipt can be carried out as of any date or for any period of time (5, 10 days, etc.).
If there are repeated facts of violations of delivery conditions for certain suppliers, then the analysis should use information about the claims made against these suppliers and about the measures of economic pressure (sanctions) applied to them for violating the terms of contracts for the supply of goods. When analyzing, you should evaluate the possibility of refusing to enter into future contracts for the supply of goods with suppliers who previously committed repeated violations of the terms of the concluded contracts.
DEFINITION
Turnover rate is the most important quantity that is necessary when planning the required amount of inventory. Using this coefficient, you can determine the number of inventory turnover for the selected period.
The formula for the inventory turnover ratio on the balance sheet reflects the efficiency of their use in the operation of the enterprise in the process of making a profit.
The inventory turnover ratio is a relative value, that is, it can be used when comparing several periods of a company’s operation. The formula for the inventory turnover ratio on the balance sheet calculates the number of turnovers that inventories make during the business process.
There are 2 formulas for calculating the turnover rate, which contain the following components:
- Net sales indicator (income),
- Cost of goods sold,
- Inventory cost (for example, the average for the year in the case of calculating annual inventory turnover).
Formula for inventory turnover ratio on balance sheet
The formula for the inventory turnover ratio on the balance sheet is calculated by dividing the amount of sales revenue by the average amount of inventory:
GOAT = OR / Zsr.,
B – revenue from sales of products (rubles);
Zsr. – average amount of reserves (rub.).
When calculating inventory turnover, the company's financial statements are used. The formula for the inventory turnover ratio on the balance sheet is as follows:
KOZ = line 2110 / line 1210
To calculate the denominator of the formula, you need to determine the average amount of inventory for a certain period (month, quarter, year). The calculation is made by adding the amount of inventory at the beginning and end of the period (for example, a year) and dividing this amount by 2.
Formula for calculating average inventory:
Zsr = (Znp+Zkp) / 2
Zsr = (1210np + 1210kp) / 2
Here 1210np and 1210 kp are the corresponding lines for the beginning and end of the period.
Formula for inventory turnover through cost
Some companies calculate inventory turnover in accordance with the cost of goods. The formula takes the following form:
KOZ = Seb / Zsr,
Here KOZ is the inventory turnover ratio;
Seb – cost of goods sold (RUB);
Zsr – average cost of inventories (rub.).
This method of calculation in our country is more popular than calculation by revenue.
Standard value of turnover
The inventory turnover ratio does not have specific standards that all enterprises would accept. The coefficient is most often used for calculations and comparisons between enterprises in the same industry, as well as for tracking dynamics for one specific enterprise.
If the inventory turnover rate decreases, we can talk about the following situation:
- Excess accumulated reserves,
- Low efficiency of inventory management,
- Excess of unsuitable material, etc.
Efficiency is not always reflected by high turnover, since this may be a sign of low inventory levels, which most often can lead to interruptions in the production process.
For enterprises operating with a high level of profitability, low turnover is inherent, and for enterprises with a low rate of profitability, vice versa.
Examples of problem solving
EXAMPLE 1
EXAMPLE 2
| Exercise | Determine and compare the enterprise turnover indicators for 2 months of operation, if this month there is an average stock of material of 1600 pieces, last month - 1250 pieces. 12,000 units sold this month, last month - 20,000 units. |
| Solution | Zsr (1 month) = 1600 * 31 / 1,200 = 41.3 days Z avg (2nd month) = 1250 * 30 / 2000 = 18.8 days Conclusion. Thus, we have determined that an enterprise needs an average of 41 days to sell an average inventory of products. Last month this figure was at 19 days. This situation indicates the need to reduce the quantity of imported material or increase the number of sales. We can conclude that this month’s material is turning over more slowly than last month. |
| Answer | 41.3 days, 18.8 days |
Duration of inventory turnover is the time in days during which inventory is converted into goods sold. The duration of inventory turnover shows the rate of transformation of inventories from material into monetary form.
Analysis of the duration of inventory turnover is carried out in the FinEkAnalysis program in the block Analysis of business activity.
Duration of inventory turnover formula
Duration of inventory turnover = Days in period / Inventory turnover ratio
The shorter the duration of inventory turnover, the less funds are tied up in this least liquid group of assets. Recommended indicator values depend on the industry. A decrease in the indicator is a favorable trend.
Synonyms
inventory shelf life, inventory turnover period, inventory turnover period
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The formula for the inventory turnover ratio on the balance sheet reflects the efficiency of their use in the operation of the enterprise in the process of making a profit.
The inventory turnover ratio is a relative value, that is, it can be used when comparing several periods of a company’s operation. The formula for the inventory turnover ratio on the balance sheet calculates the number of turnovers that inventories make during the business process.
There are 2 formulas for calculating the turnover rate, which contain the following components:
- Net sales indicator (income),
- Cost of goods sold,
- Inventory cost (for example, the average for the year in the case of calculating annual inventory turnover).
Formula for inventory turnover ratio on balance sheet
The formula for the inventory turnover ratio on the balance sheet is calculated by dividing the amount of sales revenue by the average amount of inventory:
GOAT = OR / Zsr.,
B – revenue from sales of products (rubles);
Zsr. – average amount of reserves (rub.).
When calculating inventory turnover, the company's financial statements are used.
Inventory turnover ratio - formula
The formula for the inventory turnover ratio on the balance sheet is as follows:
KOZ = line 2110 / line 1210
To calculate the denominator of the formula, you need to determine the average amount of inventory for a certain period (month, quarter, year). The calculation is made by adding the amount of inventory at the beginning and end of the period (for example, a year) and dividing this amount by 2.
Formula for calculating average inventory:
Zsr = (Znp+Zkp) / 2
Zsr = (1210np + 1210kp) / 2
Here 1210np and 1210 kp are the corresponding lines for the beginning and end of the period.
Formula for inventory turnover through cost
Some companies calculate inventory turnover in accordance with the cost of goods. The formula takes the following form:
KOZ = Seb / Zsr,
Here KOZ is the inventory turnover ratio;
Seb – cost of goods sold (RUB);
Zsr – average cost of inventories (rub.).
This method of calculation in our country is more popular than calculation by revenue.
Standard value of turnover
The inventory turnover ratio does not have specific standards that all enterprises would accept. The coefficient is most often used for calculations and comparisons between enterprises in the same industry, as well as for tracking dynamics for one specific enterprise.
If the inventory turnover rate decreases, we can talk about the following situation:
- Excess accumulated reserves,
- Low efficiency of inventory management,
- Excess of unsuitable material, etc.
Efficiency is not always reflected by high turnover, since this may be a sign of low inventory levels, which most often can lead to interruptions in the production process.
For enterprises operating with a high level of profitability, low turnover is inherent, and for enterprises with a low rate of profitability, vice versa.
Examples of problem solving
Definition
Inventory turnover(inventory turnover) shows how many times during the analyzed period the organization used the average available inventory balance. This indicator characterizes the quality of inventories and the efficiency of their management, and allows us to identify the remains of unused, obsolete or substandard inventories. The importance of the indicator is due to the fact that profit arises with each “turnover” of inventories (i.e., use in production, operating cycle). Please note that in this case, inventory refers to both commodity inventory (finished product inventory) and production inventory (raw material inventory).
Calculation (formula)
Inventory turnover can be calculated in two ways.
1. as the ratio of cost of sales to the average annual inventory balance:
Inventory turnover (ratio) = Cost of sales / Average annual inventory balance
The average annual balance is calculated as the sum of inventories on the balance sheet at the beginning and end of the year divided by 2.
Inventory turnover ratio
as the ratio of sales revenue to the average annual inventory balance:
Inventory turnover (ratio) = Revenue / Average annual inventory balance
In both Western and Russian practice, both calculation options can be found. The advantage of the 2nd option is that it allows you to exclude the influence of accounting policies, according to which the cost of sales can be formed taking into account administrative expenses or reflecting them on a separate line of the financial results statement. That is, organizations can be compared on this indicator regardless of the cost accounting model they adopt. Probably, in order to eliminate this problem, Rosstat of the Russian Federation takes as the cost of sales the total cost of products sold, which includes, in addition to the direct cost of sales, administrative and commercial expenses.
Along with the turnover ratio, the turnover rate in days is often calculated. In this case, this means how many days of operation of the enterprise the existing reserves will last.
Inventory turnover in days = 365 / Inventory turnover ratio
Normal value
There are no generally accepted standards for turnover indicators; they should be analyzed within one industry and, even better, over time for a specific enterprise. A decrease in inventory turnover ratio may reflect the accumulation of excess inventory, ineffective warehouse management, or the accumulation of unusable materials. But high turnover is not always a positive indicator, since it may indicate depletion of warehouse stocks, which can lead to interruptions in the production process.
In addition, inventory turnover depends on the marketing policy of the organization. Organizations with high profitability of sales tend to have lower turnover than firms with low profitability rates.
Read about inventory turnover in English in the article "Inventory Turnover".
Inventory turnover shows how many times during the analyzed period the organization used the average available inventory balance.
This indicator characterizes the quality of inventories and the efficiency of their management, allows you to identify the remains of unused, obsolete or substandard inventories.
Inventory turnover
The importance of the indicator is due to the fact that profit arises with each turnover of inventories (i.e., use in production, operating cycle). Please note that in this case, inventory refers to both commodity inventory (finished product inventory) and production inventory (raw material inventory).
The higher inventory turnover company, the more efficient production is and the less is the need for working capital for its organization.
Inventory turnover calculator
Online calculator for calculating the financial indicator of the inventory turnover ratio
Formula for calculating inventory turnover ratio
Average Inventory Balance = (Beginning Inventory + Closing Inventory) / 2
Inventory Turnover = Cost of Goods Sold / Average Inventory Balance
Example of calculating inventory turnover
It is necessary to compare the value of the inventory turnover ratio for two enterprises with the following financial results:
- The cost of goods sold for enterprise A was 923 thousand, and for enterprise B it was 1072 thousand.
- the amount of reserves is 429 thousand rubles and 398 thousand, respectively.
Let's calculate the value of the inventory turnover ratio for enterprise A:
ITRa = 923 / 429 = 2,15152.
Let's calculate the value of the inventory turnover ratio for enterprise B:
ITRb = 1072 / 398 = 2,69347.
Let's compare the coefficients:
ΔITR= ITRb / ITRa
= 1,25278
Enterprise B has an inventory turnover ratio that is 25.27% higher than enterprise A.
Synonyms: inventory turnover ratio, inventory turnover, asset turnover ratio, inventory turnover, Inventory Turnover Ratio, IT, Turnover of a Stocks, Inventory Turnover, Inventory Utilization Ratio.
Inventory turnover
In trade, goods are constantly sold and inventories are replenished. The faster this process is carried out, the less working capital is needed for its implementation, the lower the circulation costs. Therefore, the speed of circulation of goods is an important parameter for the efficiency of trading activities.
To characterize the turnover of goods, two indicators are used:
— time of circulation of goods in days;
— speed of circulation of goods in times
These indicators are calculated using the following formulas:
Where. T is the duration of one revolution in days;
K is the goods turnover ratio in the reporting period in times;
C - average inventory;. D is the number of days in the period. A - trade turnover
Average monthly balances of goods are determined by the simple average of the amount of inventories at the beginning and end of the month, divided into two quarterly averages and average annual inventories are calculated using the formula with the chronological average:
where 3" is the amount of inventory at the end of the i-th period
To determine average quarterly inventories, data for four monthly dates is used. The annual average is determined based on 13 monthly or 5 quarterly balances of goods. The more components are used to determine average inventories, the more accurate the calculation of product turnover indicators is.
The number of days in periods is conventionally accepted for a month - 30, a quarter - 90, a year - 360, regardless of the actual number of calendar days in them
The indicator of the time of circulation of goods in days expresses the time during which the average inventory turned over. Whereas the speed of circulation of goods in times shows how many times the average inventory of goods has turned over during the given period.
These indicators characterize the turnover of goods in two aspects for the same period. Therefore, there is a relationship between them, which is expressed by the formulas:
Knowing the value of one indicator of goods turnover, using these formulas you can calculate the second
In the analysis process, not only actual turnover indicators calculated for the reporting or previous periods (years, quarters), but also planned indicators are used. The planned turnover of goods is calculated quarterly. Turnover standards are calculated by quarterly stock standards in days. If data is analyzed for a year, then a standard is adopted to find the planned average annual reserves. The IVI of four quarters' inventories is added up and divided by four. To find the planned turnover of goods in the reporting year, standard average annual inventories are divided by the planned one-day turnover for this period.
Attention should be paid to the fundamental difference in the content of the indicators “goods turnover” and “state of inventory in days to turnover.” Although both of them are expressed in days, however, the turnover of goods is calculated for the period and shows the average duration of stay of goods in the form of inventory, whereas inventories of goods in days are calculated for a specific date and show the level of supply of goods with stocks, or how many days of trade will be enough for these stocks to clear out these stocks.
An analysis of the turnover of goods is carried out in general for the retail trade system of the regional consumer union, consumer society or other enterprise, as well as in the context of product groups. During the analysis, actual indicators of goods turnover are compared with planned and basic indicators. They find deviations and determine what causes these deviations, that is, they calculate the influence of factors on changes in product turnover.
The deviation of the actual time of circulation of goods in days from the planned one with a minus sign means an acceleration of turnover, because the duration of the stay of goods in the inventory state decreases. Conversely, the deviation of this indicator with a plus sign indicates a slowdown in turnover.
Calculation of goods turnover in retail trade of the consumer society is shown in Table 36
The data in Table 36 shows that the duration of circulation of goods in the retail trade of the consumer society in the reporting year was 56.1 days against the plan of 59.1 days; the turnover of goods accelerated by 3 days (56.1 +59.1). However, for non-food products it slowed down by 0.2 days, and for food products it accelerated by 1.7 days. To find out the reasons for these deviations, it is necessary to study the influence of factors on the change in the turnover of goods.
. Table 36
turnover of goods in retail trade. CONSUMER. SOCIETY. In the reporting year
The speed of circulation of goods in days for a trading enterprise as a whole is formed under the influence of two complex factors:
— changes in the structure of trade turnover;
— turnover of individual goods and product groups
The rotation speed of individual products varies significantly.
Therefore, an increase in the turnover of the share of goods with a higher level of turnover, other things being equal, has a positive effect on the overall indicator of goods turnover. And vice versa, an increase in the share of goods in turnover whose sales period is longer leads to a slowdown in turnover.
The turnover of food products in general is significantly higher than that of non-food products. Therefore, an increase in the share of food products in the turnover of a trading enterprise contributes to an acceleration of turnover, and a slowdown in non-food products.
At the same time, the turnover of individual goods and product groups depends on the impact of changes in the volume of turnover and average inventories of these goods. The order of influence of the factors considered on the turnover of goods of a trading enterprise is shown in Fig. 33.3.
Taking into account this order of factors, the methodology for calculating their influence on the turnover of goods includes two stages. At the first stage, the influence on changes in the turnover of goods of two complex factors is calculated - the structure of trade turnover and the turnover of individual items
goods and product groups. At the second stage of the analysis, the impact on the turnover of individual groups of goods of their turnover volume and average inventories is determined
Figure 33. The order of influence of factors on goods turnover
It should also be noted that among the factors influencing the structure of trade turnover, the structure of inventory plays an important role. The influence of this factor is studied during the analysis of the total volume and current structure of trade turnover.
To determine the influence of the first two factors on the turnover of goods for the trading enterprise as a whole, calculate the adjusted value of the turnover indicator using the percentage method using the formula:
. VSK =. V. I ^. IIC (320)
Where. VSK is the time of circulation of goods in days with the planned (basic) volume of trade turnover, planned (basic) average inventory and the actual structure of trade turnover;
. Te0 — planned (basic) turnover of goods for the i-th product group;
Ci1 is the share of the i-th product group in the actual volume of trade turnover;
P — number of product groups
The influence of factors on the deviation of the goods turnover indicator of a trading enterprise from planned or basic indicators is calculated as follows:
ZN (s) =. VSK -.
Inventory turnover ratio in days (formula)
ZN (T) = . T -. VSK , (322)
Where. DT (C) - the influence of the structure of trade turnover;
DT (T) - the influence of the turnover of individual goods and product groups;
T1 and. T0 - actual and planned (basic) duration of one revolution in days
Calculation of the influence of these factors on changes in the turnover of goods in the retail trade of the consumer society is shown in Table 37
The table shows that the planned indicator of goods turnover, expressed by the actual structure of retail trade turnover of the consumer society, amounted to 57.1 days (5713.4: 100)
The share of food products in trade turnover increased by 2.4% compared to the plan and the share of non-food products decreased accordingly. These structural changes contributed to the acceleration of the turnover of goods in the small trade of the consumer society by 2 days (57.1 - 59.1). While the change in the turnover of individual groups of goods - its acceleration in the group of food products by 1.7 days and the slowdown in non-food products by 0.2 days - contributed to the acceleration of the turnover of all goods by 1 day (56.1 - 57.1). So, both factors had a positive impact on the change in the overall turnover rate of goods.
As already noted, the speed of rotation of individual goods depends on the volume of their sales and the size of average inventories. Exceeding the turnover plan has a positive effect on the turnover of goods. Then, as the presence of excess stocks leads to a slowdown in the turnover of goods, and their understating according to the standard helps to accelerate the turnover. However, understated inventories can have a positive effect on convertibility only if they do not affect the volume of turnover. And this can be provided that understated inventories are compensated by improving the supply of goods by increasing the frequency of their delivery, ensuring its rhythm, and fulfilling store orders not only in terms of volume, but also in assortment.
If understated inventories were formed due to insufficient supply of goods, interruptions in the supply of the retail network, or a narrowing of the assortment, then in this case the acceleration of the turnover of goods due to the action of this factor cannot be considered as a positive phenomenon.
To study the influence of factors on the turnover of individual goods or product groups, table 38 is compiled
. Table 37
Calculation of the influence of factors on the turnover of goods in retail trade. CONSUMER. SOCIETY. BEHIND. REPORTABLE. YEAR
|
Product groups |
Structure of trade turnover,% of total |
Turnover of goods, days |
Percentage numbers (gr3 x gr5) |
Influence of factors on changes in goods turnover in days |
|||||
|
actually |
deviations |
actually |
Deviation (- acceleration slowdown) |
turnover structures |
turnover of individual product groups |
||||
|
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
|
Foodstuffs |
|||||||||
|
Non-food products |
|||||||||
. Table 38
Calculation of the influence of factors on the turnover of individual groups of goods c. RETAIL. TRADE
CONSUMER. SOCIETY. BEHIND. REPORTABLE. YEAR
|
Product groups |
Turnover of goods, days |
|||||
|
with actual average inventories and planned turnover |
actually |
deviations from plan |
||||
|
including due to changes |
||||||
|
1 |
2 |
3 |
4 |
5 |
6 |
7 |
|
Foodstuffs |
||||||
|
Non-food products |
||||||
adjusted turnover of goods with actual average annual inventories and planned turnover (group 3 of table 38) was calculated for each group of goods according to data from table 36
The calculation shows that the acceleration of the turnover of food products was positively influenced by exceeding the turnover plan, and negatively influenced by the presence of excess stocks. For non-food products, the slowdown in goods turnover was due to a significant underfulfillment of the turnover plan. While the understatement of inventories relative to the standard for this group of goods contributed to the acceleration of turnover. However, this impact cannot be assessed positively, because the understatement of inventories of non-food products according to the standard was one of the reasons for the failure to fulfill the turnover plan for this group of goods in the reporting period.
The same methodology is used to analyze the turnover of goods in individual stores. However, there is always data on the volume of turnover and inventories by product group, which limits the possibilities of analysis
Accelerating the turnover of goods is facilitated by measures aimed at increasing the volume of trade turnover and normalizing inventory
