Inventory Turnover Ratio: Definition, Formula, Working, And More
If the inventory turnover ratio of your business is high, it means that your business is able to manage its stock in an effective manner. The measurement gives you an idea of how many times the inventory of your business is sold or used in a given period of time. If you compare the cost of sold goods of your company against your business’s average inventory, you will get the inventory turnover ratio of your business.
In this article, you will learn what inventory turnover ratio means in business and how it works. Apart from that, we will also discuss the formula of inventory turnover ratio so that you are able to measure your business’s inventory. Additionally, you will also learn about what is a good inventory turnover ratio for a business. Finally, we will share with you a simple example by calculating the inventory turnover ratio.
What Is Inventory Turnover Ratio? – Definition
According to Investopedia,
“Inventory turnover is a financial ratio showing how many times a company turned over its inventory relative to its cost of goods sold (COGS) in a given period. A company can then divide the days in the period, typically a fiscal year, by the inventory turnover ratio to calculate how many days it takes, on average, to sell its inventory.”
With the help of the inventory turnover ratio, you will be able to make better business decisions related to various factors in the business. Some of these factors include pricing, marketing, manufacturing, and purchasing. Calculating this ratio will allow you to measure how well your business is making use of its assets.
Read More: What Is Continuity In Business, And Why Is It Important?
How Does Inventory Turnover Work?
The inventory turnover ratio of your business will help you evaluate how efficiently your business has been using its inventory within a time period against the cost of goods sold in the same period of time. This will give you a clear picture of how the business is making use of its inventory. This further helps in making informed decisions in the future and helps in assessing factors like pricing, production, and manufacturing.
Two factors help in determining the inventory turnover ratio –
Cost of Goods Sold (COGS):
This is the cost associated with the production of the business or the purchasing of the products that the business later sells to the customers.
Average Inventory:
This is the average of the costs of the inventory that the business pays over multiple time periods.
Basically, the inventory turnover ratio helps the business to improve its inventory management process. If the inventory turnover ratio is high, then it indicates that the business has strong sales or the inventory is not up to the mark. On the other hand, a low inventory turnover ratio indicates that the business is stocking too much inventory and is not selling enough.
According to the Forbes Advisor,
“Knowing how often you need to replenish inventory, you can plan orders or manufacturing lead times accordingly. When inventory isn’t moving quickly, the business must analyze why. Possible reasons could be that you have a product that people don’t want. You may not be doing enough marketing for that product. Or, you can simply buy too much stock that is well beyond the demand for the product.”
What Is The Formula For Inventory Turnover Ratio?
You can calculate the inventory turnover ratio by dividing the cost of goods sold in a particular time period by the average inventory cost in the same time period. Here is the formula for the inventory turnover ratio:
| Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory |
What Is A Good Inventory Turnover Ratio?
According to Nerdwallet.com,
“The higher your inventory turnover ratio, the better — within reason. […] If your inventory turnover is low, your stock might be spending too much time sitting on your shelves, not being sold. That translates into money being wasted on inefficiently used storage space, plus the possibility that the longer the inventory sits around, the more likely it’ll get damaged or depreciate in value.”
In general, the higher the inventory turnover ratio, the better it is for businesses. However, if you are the owner of a small business, you must consider the types of products you deal with, as well as the inventory turnover range that is common for your industry.
For example, businesses that deal with perishable goods, like groceries, bakeries, and related businesses, mostly have a very high inventory turnover ratio. This is because of the fact that the products of these businesses expire soon and lose value much faster. On the other hand, businesses that deal with non-perishable goods like shoes generally do not have a high inventory turnover.
Explaining Inventory Turnover Ratio With An Example
Let’s find the inventory turnover ratio of a company named XYZ.
As per the income statement of XYZ, the cost of goods sold amounted to $2 million.
The cost of inventory of XYZ for the start of the year was $250,000, and at the end of the year, the inventory amounted to $750,000.
Therefore, the average inventory price of XYZ = ($250,000 + $750,000)/ 2 = $500,000.
Now, since Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Therefore, the Inventory Turnover Ratio for XYZ = $2 million / $500,000 = 3.
This means that the business sold its inventory three times over throughout the entire fiscal year. Hence, it takes an average of 122 days (365/3) to fully sell out its inventory.
Read More: Business Continuity Plan – What Is It, And How Does It Work?
Final Thoughts
Calculating the inventory turnover ratio of the business will allow you to get a good idea of how efficiently the business is managing its assets. You can calculate the inventory turnover ratio for your business by finding out the cost of goods sold and dividing it by the average value of the inventory within a given period.
A higher inventory turnover ratio shows that the business has strong sales. However, in some cases, it also indicates that the inventory stocking of the business is inadequate. Do you have any recommendations regarding how to manage inventory better? Share your ideas with us in the comments section below.
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In addition, there are different types of marketing you can do with your packaging of canned foods. What Are The Top 10 Cheapest Canned Food Available Now? Whenever housewives go shopping, they search for the cheapest quality food products for their household. Now I will provide you the list of items that can offer you quality with affordability. Canned Food Items Price Of The Canned Foods Canned Mushroom Rs. 1248/carton Canned Vegetables Rs. 150/kg Canned Baby Corn Rs. 1824/carton Canned Bean Rs. 125/kg Canned Sweet Corn Rs. 185/kg Canned ChickPeas Rs. 56/kg Canned Spinach Rs. 85/kg Canned Peeled Tomatoes Rs. 95/container Canned Ginger Rs. 895 Canned Carrot Rs. 142 These are some bottled and jar packaged goods you can get from the market at a cheaper price. However, you cannot make a compromise on it as it is one of the best options to develop your business. 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It is one of the best options for the warehouse owner or the retailer to offer the maximum facility. It provides you with a greater level of flexibility, and you can use these foods at the time of emergency. Reduces the scope of the damage and pilferage during the time of transportation. 6. Cans Are Unbreakable If you use the glass bottle or the jar falls on the floor, it will break away. But, on the other hand, when you use the cans, you will get relief from the chances of damage. It is why the demand for bottled and jar packaged goods is now increasing rapidly in the industry. Today, 89% of the warehouse owners in the world prefer to use canned packaged goods all over the world. You can save plenty of clean-up time when you make use of the canned goods for your business. 7. They Block Light Canned packaged food items block the entry of light on the food items that are stored in them. The main reason behind this fact is it is not one of the best choices for humans. There are several benefits of using canned packaged goods for your health as well. Some of the main reasons are as follows:- It protects the food items from excessive light, and so it prevents the precious nutrients and vitamins from getting destroyed from the food items. Compared to glass jars, cans are suitable to prevent the chances of ingredients loss of the food items. Why Should You Not Consume Canned Packaged Foods? Although there are some benefits of consuming canned packaged foods, it does not mean they are free of any health hazards. Here are some drawbacks you need to keep in mind before consuming canned packaged foods – 1. They Contain Some Amount Of BPA We know that exposure to BPA can affect the functionality of the endocrine system. Canned packaged foods contain some amount of BPA. Consuming canned foods on a daily basis increases the chance of exposure by 1000%. According to some studies, this exposure can be linked back to diabetes, male sexual dysfunction, etc. 2. 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On the other hand, many researchers found that canned foods actually preserve the nutrients of a particular food product. In canned food, the protein, fat, and carbs are unaffected. Furthermore, there are some minerals and fat-soluble vitamins like Vitamins A, D, E, and K that stay with the food. Canned Foods Have High Nutrient Content? You must be surprised to know that there are some studies that show that there are foods that are high in nutrients, which, on being canned, retains their nutrient levels. However, on the other hand, canning a particular food involves a high production of heat, due to which water-soluble vitamins like Vitamin C and Vitamin B get destroyed. According to Healthline.com, “These vitamins are sensitive to heat and air in general, so they can also be lost during normal processing, cooking, and storage methods used at home. 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Non-Essential Physical Retail Globalization and shifts in manufacturing locations have affected the textile and apparel industry. Some segments may face challenges due to overseas competition and changing consumer preferences. You need to know the reality from your end while attaining your requirements with absolute ease. Traditional IT services are not adapting to the growing demand for cloud computing. Artificial intelligence and digital transformation may face challenges from more agile and innovative competitors. Final Take Away Hence, if you want to grow your business in the correct order, you must follow the correct steps. You cannot just make things happen in the incorrect manner. Once you get through the complete process, things can become easier for you. You can share your views and comments in our comment box. Sharing your experience in this matter will help us to know your take on this matter. Try to keep things in perfect order. 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Non-Immigrant Sponsorship The non-immigrant sponsorship is used temporarily, where individuals cannot become US citizens. This sponsorship is valid for those people who are moving temporarily to the country. They are not permanent residents of the US. It also means that non-immigrant Visa Holders are not eligible for green cards. This Visa sponsorship USA will not be valid later for the qualification of US Citizenship. You need to travel for a short period from the USA. It will be the ideal Visa Sponsorship for you. You need to have the Employee Authorization Document if you want to work in the US. There are several non-immigrant Visas that it will require the following documents from the employer to get the sponsorship. Some of the essential factors in this regard are as follows in a better manner. H-1B Visa. H-2B Visa. H- 2A Visa. O1A- Visa. L1- Visa. O1B Visa. O2 Visa. These are the different types of non-immigrant visas that you must consider from your end to develop your case for getting the sponsorship. All these factors you must consider from your end to get the sponsorship for the Visa on time. How Can You Get The Immigrant Sponsorship? You can get the immigrant sponsorship for the immigrant Visa and the green card. For the immigrants who hold a Visa sponsorship, they do not require any separate employment authorization. This Visa will enable you to live in the United States and become a country’s legal permanent resident. Some of the standard and most popular immigrant Visas that you can derive from the immigrant sponsorship are as follows:- EB-1, 2, 3, 4 visas are some of its popular visas that you must consider from your end. You cannot ignore these Visa categories as they can prove to be very handy for you at times. Different Steps You Must Follow To Get The Sponsorship Letter You must consider several essential steps for getting the sponsorship letter for your business. Therefore, let’s explore the process to get a better understanding of these facts. The justification and the documentation must be accurate in this regard. Let’s explore the steps to get the right idea of these facts to get a better idea about the services:- The initial step you must consider here is that your employee must get the US employer’s offer. If you are a non-immigrant, you need to produce a proper labor certification for the labor department. You need to submit the petition to the USCIS along with all the documents. With the submission of all the documents, your documents will be processed by the Visa department, and it will take months to provide you with the Visa Sponsorship. If the application is approved and the report is positive, both the employee and the employer must be informed. If your application is rejected, then both the employer and the employee will be informed immediately. You must consider these facts from your end while you are developing your business. All the above factors are crucial for developing your chances of getting the concerned authorities’ visa sponsorship. The visa rejection chances may be due to the employee's qualifications and inadequate documentation from the employee’s counterpart. You must consider every aspect from your end to get the visa on time and effectively. If you want to get the sponsorship on time, then these facts are crucial. Check out this YouTube video: Requirements of US Visa Sponsorship for Employment https://www.youtube.com/watch?v=kUDXjVMHaGo Final Words Hence, if you plan to get the Visa Sponsorship, then you must consider the above things from your end. It will help you to get the Visa on an immediate basis. Ensure that you have correctly followed the norms. It will help you get the sponsorship on time, and you can maintain the norms in the correct order. Ensure that you have followed all the factors properly. The more you can think proactively, the better you can achieve your business goals in a better manner. Ensure that you have not made any mistakes on your end to develop your business correctly. The more you can think positively, the better you can effectively achieve your goals. Also Read: Fiscal Sponsorship – Everything You Need To Know About It How To Make Money Fast – 5 Strategies To Follow Top 5 Successful Serial Entrepreneurs of All Time – Updates 5 Most Powerful Marketing Strategies That Will Change Your Business
Mar 12, 2021
What Is Mortgage Buydown? Essential Things To Know About It
Mortgage buydown is the prepayment of the payment when you pay the interest upfront. It can reduce your monthly payment, which can help you to rocket the interest savings for the long term. You need to know the process to make the correct choice as a homeowner. A mortgage buydown is a financial arrangement in which a homebuyer or a third party, such as a builder or seller, pays additional upfront funds in exchange for a lower interest rate on a mortgage loan. This can be useful to make the monthly mortgage payments more affordable for the borrower. It is important, especially in the early years of the loan. Different Types Of Mortgage Buydowns There are several types of mortgage buydowns that you must be well aware of the facts while achieving your goals with ease. You need to get through the process that can make things easier for you in all possible manner. 1. Temporary Buydown In a temporary buydown, the borrower or a third party contributes funds to the lender to reduce the interest rate. On the mortgage loan for a specified initial period, often 1 to 3 years. You can buy an LLC to attain your requirements. This temporary reduction in the interest rate can make the monthly mortgage payments more affordable for the borrower. Especially during the initial period. The additional fund offer is usable to subsidize the lower interest rate. The subsidy decreases over time until the interest rate returns to the original, higher level. 2. Permanent Buydown A permanent buydown involves paying additional funds upfront to the lender to permanently lower the interest rate over the entire life of the mortgage loan. This type of buydown can result in a lower monthly payment for the borrower throughout the term of the loan. Benefits Of Mortgage Buydown There are several benefits of the Mortgage Buydown. You need to get through the complete process that can assist you in attaining your goals with absolute ease. Ensure that the scope of errors is as low as possible. 1. Lower Initial Payments One of the primary benefits of mortgage buydowns is that they can result in lower initial monthly mortgage payments. This can be helpful for homebuyers who may face financial constraints in the early years of homeownership. Those who want to allocate their funds to other expenses they can also go for mortgage buydowns. The application of Experian.com can be of great help to you. 2. Improved Affordability By reducing the monthly mortgage payments in the initial years, mortgage buydowns can enhance the overall affordability of homeownership. This may enable individuals or families to qualify for a larger loan amount, making it easier to purchase a home. Vertical vs Horizontal Integration can make things easier for you. 3. Easier Qualification Lower initial payments resulting from a mortgage buydown may help borrowers qualify for a mortgage. They might not have qualified for a higher initial interest rate. This can be especially beneficial for first-time homebuyers or individuals with tight financial profiles. Net operating income can make things easier for you. 4. Seller Incentives Sellers may use mortgage buydowns as an incentive to attract buyers and make their properties more appealing. Offering a temporary reduction in the buyer's mortgage interest rate can differentiate a property in a competitive real estate market. 5. Reduced Interest Cost While there is an upfront cost associated with a mortgage buydown, the borrower can save money on interest payments over the life of the loan, especially with a permanent buydown. This can result in significant long-term savings, particularly if the borrower plans to stay in the home for an extended period. 6. Financial Flexibility For borrowers who anticipate an increase in income in the future, a temporary mortgage buydown can provide financial flexibility. It offers lower initial payments during a period of lower income, with the expectation that payments will increase later. 3-2-1-Buydown Calculator A 3-2-1 buydown calculator is a tool that helps individuals, typically homebuyers or those involved in real estate transactions. It estimates the potential savings and costs associated with a 3-2-1 buydown arrangement on a mortgage loan. The "3-2-1" refers to the structure of the buydown. It indicates different percentage reductions in the interest rate for the initial three years of the loan. 1. First Year In the first year of the mortgage, the interest rate is reduced by 3% below the actual interest rate determined by the lender. 2. Second Year In the second year, the interest rate is reduced by 2% below the actual interest rate. 3. Third Year In the third year, the interest rate is reduced by 1% below the actual interest rate. You need to get through the details of the facts to have a better idea of it. Avoid making the process more critical of your counterpart. Key Steps Involved In 3-2-1-Buydown Calculator There are several key steps that are involved in the process of the 3-2-1 buydown calculator. You need to take care of these facts with your counterpart. Some of the key factors that you must know are as follows:- Enter The Loan Details Input the loan amount, the original interest rate, and the term of the loan. Calculate The Buydown Amounts The calculator will determine the reduced interest rates for each of the three years based on the 3-2-1 structure. Display Adjusted Payments The calculator will show the adjusted monthly mortgage payments for each of the three years, considering the buydown. Total Cost Of Buydown Some calculators may also provide the total cost of the buydown, which is the sum of the upfront funds paid to achieve the reduced interest rates. 3-2-1 buydown calculator, individuals can assess the short-term affordability benefits of the buydown. You can make informed decisions about whether this type of mortgage structure aligns with your financial goals and circumstances. Final Take Away Hence, if you want to grow your mortgage buydown in the correct order, then you must take care of the above facts that can assist you in attaining your goals. You need to get through the process that can make things easier and perfect for you in all possible. 3-2-1 buydown calculator, individuals can assess the short-term affordability benefits of the buydown. You can make informed decisions about whether this type of mortgage structure aligns with your financial goals and circumstances. You can share your views and comments in our comment box. It will assist you to attain your requirements with ease. Find out the best options that can make things easier for your business. Go For The Best Business Article By Clicking Below!! Entrepreneurship – Definition, Meaning, Scope, And More What Are The Different Types Of Entrepreneurship? – Take A Look What Is Indemnity Insurance? And Its Different Types – Let’s Discover
Nov 23, 2023