The logic here is that selling more items, even at a lower price, helps you sell more than selling fewer items at a higher price. After all, the last thing you want is to hang on to your inventory for a long time. Even if you sell made-to-order products, you want to make as many sales as possible in as short a time.
Here’s how to calculate how your inventory turnover is working out.
Start with a benchmark. The formula works out like this:
Cost of goods sold (COGS) / Average inventory
You sold 1,000 units at the cost of $10,000. Your average inventory value was $5,000. Thus, $10,000 divided by $5,000 equals 2. This figure means you had to replenish your stock twice during the specific timeframe (week, month, year).
Next, track the change in your stock turnover by the result you get from the formula. In short, the higher the number you get, the more often you need to replenish your stock.
What does that mean? You’re selling more because you have to replenish your stock much more often. In contrast, a lower number means your stock isn’t moving quite as much since you don’t need to replenish items as often.
Please bear in mind that every industry is different. Nevertheless, most industry standards consider an inventory turnover ratio of 5 to 10 as healthy. Anything below 5 is concerning, while anything above 10 is fantastic.