Does your business have to deal with stock rotation? Do you know how to calculate it properly? All will be explained in this upcoming article, ensuring you can have a handle on your inventory for good.
It’s absolutely vital that you understand inventory turnover because it’s something your business will have to continuously monitor, just as much as you monitor your stock day-to-day. It’s known that this is a huge task that takes up a lot of your time, but its needs must. So, if you are already doing this on a daily basis, then let’s explore how to do it in the most efficient way. So what exactly is stock rotation and how is it calculated?
What is the stock turnover rate (IR)?
Before understanding the rate, let’s strip it down and start with the basics. What is inventory turnover? The immediate definition is that this a concept that indicates the times when the stock of a warehouse needs to be replenished in its entirety. In simpler terms, it’s the times when you have to feed the warehouse with products, to keep it working correctly.
This now sets us up to explain what the stock turnover rate (also known as, IR) is, it’s the specific ratio that measures the times in which an inventory needs to be replenished. If your ratio is high, that means that the flow of goods is constant, sales are constant and therefore, you’re most likely seeing higher profits as a business.
However, because you see a higher inventory turnover rate, it does not always mean that your storage costs are lower. Always, there are pros and cons to any concept to do with business and we need to explore both.
Therefore, if you have a high index, it indicates that the products are popular and are in the warehouse for a short time, so we will avoid undesirable costs such as, any costs generated by expired products or by the deterioration of old products. However, you will need a more powerful logistics system to manage the volume of sales, which may involve higher costs.
Pros and cons will depend on the specific case of each company, you should analyse your business and understand what yours are.
How to calculate stock rotation?
Calculating stock turnover is very useful to avoid unnecessary costs. So you are most likely wondering by now how to calculate it in the most efficient and effective way possible. Well, if you follow the steps below you should be onto a winner;
- Choose the time period from which you are going to calculate inventory turnover.
- Calculate the total costs of the goods that you sold in that specific period of time. This will include direct costs of creating your product and the labor costs involved with its manufacturing.
- Divide that total cost by the average of your inventory. You can work out your average by counting the amount of products that are usually held in the warehouse during the unsold period of time. To get an accurate values, just add the initial and final inventory of the specific time period, and then divide it by two.
- Take the division of total costs by the average inventory and you will be presented with your inventory turnover.
You should take this calculation of stock rotation, analyse your business, and draw conclusions about the operation of your company. Also, what will help is if your employees know exactly how to manage your stocks efficiently. To do this, nothing is better than a good ERP Cloud software, which allows working in real time and in the cloud.