Inventory turnover / Inventory turnover rate

Inventory turnover is a measure that characterizes the inventory management of a company. A high value may indicate efficient inventory management, but it may also indicate too low inventory.

From the point of view of the successful operation of enterprises, the key issue is the economical use of resources, in Hungarian, efficient operation. How successful this is at the given company is efficiency indicators can be examined by analyzing One of these is the inventory turnover rate, which characterizes the company's inventory management.

The inventory turnover rate shows that a given period (typically a business year) the number of times the company's average inventory is turned over. The index is direct sales cost and the quotient of the average stock. It happens that instead of the direct cost with sales revenue are calculated, but this distorts the indicator upwards. 

A higher value may indicate efficient inventory management, but it may also indicate a lower than justified inventory level. Thinking in the latter case, for example, that it can cause a loss of market for a business if it cannot satisfy its customers' needs in time because a product is regularly out of stock.

Sometimes they look at the inventory turnover rate in days. They therefore indicate how many days the average stock is sufficient for. During its calculation, the average inventory value is multiplied by the number of days and divided by the sum of direct costs. In this case, the lower value is more favorable: the shorter the inventory is in the warehouse, the more efficient inventory management is. Of course, the reservation already mentioned above also applies in this case, so that in the meantime uninterrupted service to the company's customers is ensured.

In general, it makes no sense to talk about the specific value of the inventory turnover rate that means effective inventory management. To compare these indicators (like most indicators that characterize the operation of the enterprise) with the data of sector peers, sectoral with benchmarks worth. Furthermore, the evolution of this over time can be useful information for company managers, i.e. examining how the given indicator of their own company developed compared to previous periods. 

It may also be expedient to compare the value that characterizes inventory management with other efficiency indicators, for example rotation speed of receivers and the turnover rate of suppliers to be examined together with metrics. 

These indicators are extremely important even if the business needs additional resources. If from a bank, for example current asset - obsession overdraft we would like to claim, we can be quite sure that based on our business statements the credit application during its assessment, the financial institutions will also examine the development of these indicators.