Activity-Based Financial Ratio: Turnover of Inventory

June 9th, 2006 Comments off
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TURNOVER OF INVENTORY:

FORMULA

Net Sales / Inventory

MEASURE WHAT

Measure the efficiency of the usage of inventory in generating sales

SCORE/VALUE

Varies.

The higher is the more effective

SALIENT POINTS TO NOTE

Comparing similar periods and similar industry statistics determines measures of efficiencies by which the assets in this inventory are employed in the business.

The faster the turnover of inventories, it means that there will lesser obsolete or slow moving stock. With a higher inventory turn, inventory are more frequently being  roll out from the warehouse for delivery to the customers.

This financial ratio forms part of the working capital cycle management or cash operating cycle of the business. With a higher inventory turn, goods delivered to the customers can be billed hence quicken the turn on accounts receivable with the ultimate objective of getting the monies back from the customers. 

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Financial Accounting

 
 

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