Inventory Turnover Ratio
Category: Strategic
Measures how often inventory is sold and replaced during a given period, showing the efficiency of inventory management.
What it Measures ?
How often we use up and replace our stock.
Relevant StakeHolders
Inventory Manager, Finance Controller
Why it Matters ?
Tracks inventory management efficiency.
In-depth Use Case / Real-world Example
Inventory Turnover Ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory value. If a company has COGS of ₹1,000,000 and an average inventory value of ₹200,000, the ratio is 5, meaning the company sells and replaces its inventory 5 times a year. A high turnover ratio indicates effective inventory management and good product demand, while a low ratio may suggest overstocking or slow-moving goods. Manufacturers with a high turnover can free up cash flow and reduce storage costs. Tracking this KPI helps ensure that production isn’t overstocking items that aren’t selling.