Guide to Inventory Turnover
Inventories, Inventory Control, and Inventory Turnover
Inventory control and inventory turnover can be complex and intimidating subjects. Inventory is, after all, the heart of every company, no matter how small or large it may be, since inventory is one of your most important assets and often the main revenue generator.
Inventory control and turnover are essential for various reasons. Meeting demand depends on the proper flow and use of inventory and, therefore, profit. In addition, its mismanagement can generate losses that threaten the viability of your company.
Inventory control is thus one of your best tools for implementing processes that increase your profitability and make business decisions. To be successful, your business needs healthy finances and effective inventory management. Micro, small, and medium enterprises rarely pay enough attention to inventory control and turnover. Some don't even have any registry, policy, or system in place to complete this task.
What Are Inventories?
Inventory is the raw materials used in production and the goods produced that a company sells. Raw materials, work-in-progress, and finished goods are all types of inventory.
What Is Inventory Control?
Inventories constitute assets because they form part of your economic capital. Therefore, they need proper management or control. Having reasonable inventory control consists of keeping all stock variables in check (including turnover), which can prepare you for a possible expansion in your operations. Inventory control gives you financial indicators to know how your business is doing.
What Is Inventory Turnover?
Inventory turnover is a fundamental indicator you will get with proper inventory control. It works to measure the correct planning, organization and logistics management that a company is carrying out.
The inventory turnover ratio measures the number of times that the product stock or merchandise has had to be replenished within a given period. This is a variable that indicates the frequency with which the supplies are sold.
In many organizations, determining the correct organization of their logistics and warehouse management is key to determining their profitability. Being prepared with raw materials and products for sale at all times is critical. Effective warehouse management is essential whether you are a retailer, wholesaler, or a company in the industrial or production sector.
For different sectors and product types, the turnover ratio for inventory will be higher or lower, as fresh products are not renewed with the same speed, nor do technological ones have the same sales capacity or financial ratios. Inventory turnover is different in a department store with online platforms than in the local manufacturing industry, for example.
Both supply logistics and the company's sales and purchasing departments are involved in stock planning and replenishment.
Stock management software has become essential across various industries, including eCommerce, to maintain required productivity through effective inventory management. In some cases, a more complex platform, such as an ERP for inventories or logistics software, can also be used for this type of management.
If you need help calculating the turnover ratio, Shopify's guide can make it simple. But, in short, the formula they recommend follows:
“To calculate the inventory turnover ratio you’ll want to divide the (COGS) or cost of goods sold by your average inventory (starting inventory plus ending inventory in a given time period divided by two).
COGS/ (starting inventory + ending inventory/2) = Your inventory turnover ratio.”
Keys to Improve Inventory Turnover
You can keep the turnover variable under control by following these tips.
Shorten supply times
It can be advantageous to choose new suppliers that offer shorter delivery times or negotiate faster delivery terms with your current providers. It is crucial to improve purchasing management, align with demand more efficiently, and avoid frozen and expired products.
Maintain an optimal level of stock
The ideal inventory turnover rate should be based on how long it takes for your company to acquire a new assortment, and it shouldn't be too high or too low to leave the unsold product in your warehouse for an extended period.
Search for accuracy in forecasting demand
By forecasting demand, safety stocks can be reduced without increasing shortages. You can always determine guidelines to maintain the proper levels using historical reports.
Install warehouse management software
The system will automate calculations and replenishment orders, identify products with higher turnover and prevent stock outages.
Keep extra cash options at hand
You will likely need financial support if you want to keep growing, regardless of how established your business is or how well your inventory turnover is going. You can find alternative eCommerce financing options to help you grow your business.
Outside-the-Box Financing for ECommerce Based on Inventory
ECommerce inventory funding options are best provided by companies that understand your business. These financiers assist you in obtaining the funds you need, when you need them, without putting your business at risk. You can easily support inventory control and turnover with a helpful influx of cash.
In contrast to traditional forms of capital access, such as credit cards and bank loans, which have minimum payments, origination fees, credit limits, and other restrictive requirements, eCommerce financing providers eliminate many of these constraints. ECommerce companies looking to maintain healthy working capital to keep inventory on hand and grow their business can benefit from this option.
Unlike banks, this option doesn’t require you to fill out a mountain of paperwork, nor will you wait for weeks or months before getting approved. All you may have to do is provide basic information, connect your online store so they can assess your typical revenue and sales pattern, and you will be pre-approved for a dollar amount within minutes. The cash may be available within days.
You don’t repay the cash deposit until you sell products. Repayment is synced automatically with your actual sales, as the company debits a small percentage of every sale. This repayment schedule prevents carries much less risk for you and ensures you always have the cash you need to purchase more inventory.
An Introduction to Inventory Funding
Thankfully, we live in an era where eCommerce has made it possible to access just about anything with a click of a button. A customer looking for something and needing it doesn't have to be restricted to their immediate environment but can find it anywhere. For businesses to thrive, they do not need to be limited to a specific location and business hours.
At the same time, customers' expectations are increasing, and they're becoming more demanding. As online shops become more prevalent, customers can be more strict with their needs. The ability to place a call or an online order any time of the day and receive goods on their doorstep is no longer enough.
You must pay close attention to inventory availability, management, and turnover to compete, as customers know they have many options if you can’t fulfill their expectations.
What is Inventory Funding?
First, let’s explain what inventory funding is before discussing how it may boost your eCommerce business.
Inventory funding or inventory financing refers to the provision of capital used to purchase goods for sale. With this type of financing, you typically consider your existing inventory without adding extra collateral.
Essentially, it helps you grow your business by securing more products to serve your customers better.
Putting your funds to good use: Front loading inventory
It can be challenging to load inventories but it can help your business weather fluctuations in sales cycles and maintain inventory levels in the right circumstances. As with any strategy, there's a trick to it.
To forecast the future, you must keep inventory turnover in check and track previous years' sales and current market conditions to analyze trends. By doing this, you'll be able to make better decisions about inventory in the future. Nevertheless, front-loading stock can benefit your business in many ways:
Get ready for peak shopping periods
Stocking up on products before busy times is more straightforward with inventory funding. Including holiday planning and preparation for seasons when your product is in high demand; you can be ready if you have a seasonal product.
Although you may not see the same spikes throughout your catalog, you can stock inventory accordingly by making decisions based on previous sales and promotions or choosing focus products you would like to sell. Stocking up on products ensures protection from fluctuating manufacturing costs.
Sort political climates and weather challenges and their effects on the supply chain
These two factors can significantly influence your supply chain and drastically affect the production and supply of the goods you sell. Over the past years, we have all gained experience navigating unpredictable situations. As a result of the COVID-19 pandemic, the supply chain has suffered drastic impacts during eCommerce's growth, driven by necessity while consumers were housebound.
Generally, uncertain political and financial climates and restrictions on goods flow have caused havoc on the supply chain. The pandemic has highlighted just how fragile the supply chain can be by demonstrating how globally interconnected we are.
These issues also significantly impact your business on holidays and peak seasons. During the holiday season, bad weather may affect deliveries to customers throughout the country. Having stock on hand will save your customer time since those delays would apply to receiving inventory into your warehouse.
By front-loading stock, you will be able to fulfill as needed, whereas your competitors may end up with long lead times.
Establish your reputation for reliability
You need a solid reputation in a saturated market. Many eCommerce sites are available with nice storefronts and comprehensive catalogs, and if you sell on platforms like Amazon and Shopify, you live and die by reviews and Amazon Prime. But no matter where you sell, your service and delivery capability are what set you apart from the competition.
Your customers will appreciate your ability to ship what they buy quickly when you have inventory funding. Customers may lose out on you when there is a shipping delay. A recent study found that consumers will only wait a maximum of 4.5 days to receive their order, but many expect it within two days.
It may seem unfair, but that is the reality. Your business will be able to focus other cash flow on various aspects of customer service and support, as you have funds devoted to stocking inventory.
Advantages of Inventory Funding
Our discussion about inventory funding has covered many advantages already. When leveraging this financing option for your business, there are a few more factors to consider as a plus.
Free up inventory-backed cash for your business
Most of your ongoing expenses as a business aren't directly related to inventory. It is, of course, contingent upon you keeping a large amount of stock on hand.
This allows you to reinvest in other business initiatives by releasing cash flow otherwise spent on product purchases. These include marketing, operational expenses, and diversification of your offerings.
A revolving credit facility
Inventory funding has the advantage of allowing you to leverage a revolving line of credit. This can be highly beneficial to small businesses. Credit lines will enable you to borrow funds within a predetermined limit whenever you need them. The money can then restock inventory, meet payroll, or cover operational costs.
Your credit score improves as your business grows
You can use inventory funding to meet your financial obligations and enable your business to grow. However, expenses increase as your business expands.
You will be able to strengthen your credit report by establishing rapport with your financial institution through inventory funding. As your business grows, you'll be able to request additional funding, and you'll be able to meet the needs of your expanding enterprise.
Maintain security even during those tough times
Virtually every business has peaks and valleys in its sales cycle. The intensity of this fluctuation varies according to the products you offer.
You will likely have lower periods if your products are seasonally focused. Knowing that your sales will dip can help you prepare, but it won't put more money in your account. If less money comes in, you'll still need to cover operating costs and stock up in anticipation of the upswing in sales.
Inventory financing will keep you afloat. When peak season returns in a few months, you'll be able to order stock to have on hand to meet the demands of operating costs.
Keep All Inventory Variables Healthy, Even Turnover
If you own an eCommerce business, you have unique needs that set you apart from other companies. You're likely to experiment with inventory turnover and products when you are just starting until you find a niche. Because you don't have a traditional shop, ramping up with digital marketing might take some time.
Suppose you want to grow your business and invest in it without overcommitting yourself. In that case, you'll need a financing partner who can help you fund inventory, marketing, and other short-term projects. Onramp understands how to run an eCommerce business from startup to growth. Our eCommerce financing options are tailored specifically for you. You can apply in minutes here.