What is a good inventory turnover ratio for retail?

Inventory turnover, or stock turnover, is the measurement of how many times a company needs to replace the inventories that it had sold in a specific range of time, either annually, quarterly, or monthly.

Inventory turnover ratio identifies how fast you sell and how often you refill your inventory. This metric is critical for merchants that sell perishable or time-sensitive goods, such as food, fast fashion, automobiles, and periodicals. Moreover, an overabundance of inventory may lead to dead stock, especially as seasons change and customers no longer buy obsolete items.

Keeping an eye on your stock turnover rate will give you many insights into what products are bestsellers, as well as how you manage your inventory carrying cost. This number can help you make better decisions on many facets of business operations such as manufacturing, pricing, marketing, and purchasing new inventory.

Also read: 11 Efficient Inventory Management Procedures 

You can follow this formula to calculate your inventory turnover:

Inventory turnover = Cost of goods sold (COGS) / average inventory in a time range

For example, a fashion boutique sold $600,000 in products for a year, and they held $200,000 of inventory on average. Their stock turnover ratio is 3 (equals $600,000 divided by $200,000). This indicates that their inventory had to be replenished 3 times in the year, which is a quite profitable rate.

Let’s take a look at another example: A pet shop sold $300,000 in items this year and had $750,000 of average inventory in stock. This makes their inventory turnover rate 0.4 (equals $300,000 divided by $750,000). This number shows that the shop is having a problem with overstocking and implies an inefficiency in marketing and sales activities. Their capital is being tied up on their stock sitting on the shelves.

An ideal inventory turnover ratio for retail is between 2 and 4. However, it can vary among different industries, so you should research the benchmarks for your specific industry.

A low inventory turnover may reflect issues in your sales strategy or low market demand for your products. In general, the higher the stock turnover rate, the higher the chances of achieving your goals. After all, with a high ratio, you can reduce the cost of holding products, thereby streamlining your company’s liquidity and financial health.

However, an extremely high inventory turnover is not always positive. In some cases, it is caused by an insufficient inventory, potentially leading to lost sales if the product is sold out. Therefore, it’s crucial to keep a balance between your purchasing level and your sales performance to optimize your inventory management.

1. Invest in an inventory management system

After knowing the ratio benchmark for your industry, it’s time to optimize your inventory turnover measures. The foremost recommendation is to install an effective inventory management system, especially if you are selling omnichannel, both online and offline.

With a proper solution, you can know instantly when an order is made and the stock is updated accordingly. A good inventory system will send you notifications when it’s time for restocking. Therefore, with every process well-controlled under the system, you can easily record all sales activities and generate reports in real time.

Having an inventory management system can bring you many benefits:

• Improve cash flow and decrease overall costs
• Centralize and automate all business data
• Easily manage barcode

The system saves you time and effort from manual processing, helping you seamlessly control your
business operation with the highest accuracy.

There are many different tools to help you manage all stock processes. Read more about the top 8 inventory management software to find the most suitable one for you.

2. Properly forecast product demand

One of the defining characteristics of the retail industry is seasonality. Not all products can be sold equally throughout the year. Seasonal items, occasional items, and fashion trends greatly influence your decision to choose suitable products for restocking. To achieve a good inventory turnover ratio, pay attention to your customers’ demographics and the market trend to make yearly and quarterly forecasts.

Even more importantly, closely monitor your sales data to check which items are selling well or gaining popularity. Use this information to develop your forecast and modify it along the way if any other factors come up. In general, you should have enough stock that’s in high demand, while ordering minimal products that sell slowly.

If you have a good forecast on which products customers will want and when they want them, you can remove the burden of keeping too much stock and enjoy a higher stock turnover rate.

Your inventory management system is a perfect assistant to gather and analyze past sales information, thereby more likely to determine seasonal trends and provide a correct prediction on future demand.

To undestand more about Inventory Forcasting, read this article: Inventory forecasting: Know when and what to purchase in retail

3. Enhance your procurement practices

Purchasing needs to align with demand. Using Pareto 80:20 principle, you should invest mainly in the 20% of products that reap 80% of the profit.

Efficiently restock products that sell

When you identify items that sell easily, restock them more regularly with a reasonable average inventory. Don’t overstock by buying huge quantities at once. This way you can order new stock before the current one gets sold and your business can run smoothly without excess inventory.

Plus, ordering stock more frequently will give you a stronger bargaining power with suppliers, even in small quantities. Remember to negotiate with vendors to see if you can get a better deal. Successful negotiation can lower your cost of goods sold, and in turn, affects your inventory turnover measures positively.

Eliminate products that sell poorly

For slow-selling products that occupy a large space in your inventory, try different solutions to move out the old stock quickly. For instance, you can offer special discounts and promotions to customers or launch a special marketing campaign aimed at moving outdated stock.

After that, if you still have a low inventory turnover, consider reselling your extensive goods back to your suppliers at a discounted rate. Some suppliers will accept the goods if they can buy them at a discounted rate and sell on to other retailers later. This will help you to get rid of excess stock and improve your inventory turnover rate.

4. Boost marketing and sales activities

Another method to improve your inventory turnover ratio is having an effective marketing strategy to sell more merchandise. Depending on your objective, you can boost sales for specific products, or reach out to more potential customers.

Using proper marketing mediums for your target customers will help you increase revenue and improve your stock turnover rate. One tip is to combine inbound and outbound methodology for your marketing strategy, then plan and execute campaigns on suitable channels. Some examples are social media, SEO, paid advertising, content marketing, and email marketing. All are effective ways to attract new customers, keep them engaged and delighted. The first thing to keep in mind is to understand your customers, then be present with them at the right time and the right place.

In addition, encourage your customers to preorder and register for certain products, especially when you’re about to launch completely new ones. This is a great way to have an initial idea of how many confirmed sales of stock you can have. Customers’ reactions to the pre-ordered products inform whether the products will have good sales, limiting inventory risk. As a result, this will increase your inventory turnover measures, all you need is to ensure that your inventory can meet the demand.

Breaking down the inventory turnover into detailed components of the business, you can see that this metric involves multiple strategies including stock management, supplier relations, logistics and operations, human management, and sales and marketing.

If a retailer has a good turnover of inventory, it implies overall good business health.

Closely supervising your inventory turnover measures will offer you a better handle on your inventory. Hence, you can make smarter decisions on procurement, keep stock moving, and sell more products to customers.

In particular, many important decisions can be informed by this metric, such as:

• What items need to be ordered: If there is a high inventory turnover for a particular item, you need to order more of it.
• What items should be pushed on sale: Stock is turning slowly? Consider putting them on sale before they become dead stock.
• What has to be ordered in advance to allow ample time for manufacturing, production, or shipping: Understanding how many times a product turns per year enables you to plan ahead and avoid untimely stockouts.

Now that you’ve known what a good inventory turnover ratio is for the retail industry and 4 ways to improve it, you are on the right track to answer those questions and get closer to the ideal inventory turnover ratio.

To wrap up, good inventory management is essential for retail businesses to fully control your inventory turnover ratio. Monitoring this metric should be taken with care since it is an indicator of your business’s health.

To help you easily control your inventory, Magestore offers an all-in-one POS system, where you can synchronize all kinds of data in real time, such as order data, customer data, and product data. The system can be customized to your needs and scalable as you expand your business. With the Magestore solution, you can track every store’s performance, manage inventory movement in one place, while giving customers a seamless experience of purchasing your products.

We are happy to give you suggestions on inventory solutions tailored to your requirements. Contact Magestore for a detailed consultation.

1. What is the 80/20 rule in inventory?

According to the 80/20 inventory rule, 80% of results are caused by 20% of effort. In the inventory field, it means that 80% of a company’s profit comes from 20% of their products.

2. Can inventory turnover be a negative number?

A negative inventory turnover happens when you sell more goods than what you have in stock. In this case, a sale is recorded but you haven’t purchased a respective inventory yet to fulfill that sale.

3. Is inventory turnover a liquidity ratio?

Yes. Inventory turnover is closely connected with working capital management and short-term financing. This is a measurement of how liquid your assets are. If you need a loan from a bank, inventory is often used as collateral, thus the bank wants to ensure the inventory is easy to sell and turned into cash.