Optimize Inventory Turnover to improve Cash Flow

Inventory Turnover is a measure of how long it takes a company to sell its inventory.

The reason why we need to optimize the Inventory Turnover is because the money invested in the Inventory Turnover could be used for other purposes. In other words, improving the Inventory Turnover ratio will improve cash flow.

The money invested in Inventory Turnover comes from three expenditures:

1.       The purchase price of the inventory

2.       Warehouse costs

3.       Storage management and maintenance costs

Inventory Turnover can be optimized through the following methods:

1.       Analyze the inventory to identify any items that have low sales or have been overstocked. Give discounts to move the inventory out of the warehouse.

2.       Enhance your inventory management software to improve the workflow

3.       Negotiate with vendors to reduce minimum ordering quantity

4.       Discontinue products that have low profit margins

Inventory Turnover= COGS/Average Inventory

You can compare your Inventory Turnover to other businesses in the same industry by using this site:

Industry Ratios (benchmarking): Inventory turnover (days) (readyratios.com)