![]() So long as you have enough inventory on hand to meet customer demands, the more efficient you can be, the better. What are we actually measuring here? Both ratios are a measure of how efficiently a company uses its inventory The higher the number of inventory turns – or the lower the inventory days – the tighter your management of inventory and the better your cash position. (Excerpts from Financial Intelligence, Chapter 24 – Efficiency Ratios) This means inventory turns over 6 times per year, or has to be replaced 6 times throughout the course of a year to keep up with demand. Example:Īssuming a DII of 60 (in other words, the inventory stays in-house for 60 days per year on average): The ability to free inventory investment allows a company to invest in other ways. The goal is to meet customers’ needs and minimize inventory. On the other hand, too little inventory means a company may not be able to meet customer needs. Inventory is also subject to obsolescence and shrinkage. It also requires additional expenses such as costs for warehousing space, utilities, insurance, and staff to manage the inventory. It ties up cash that might be used for other purposes. ![]() On the balance sheet, inventory is an asset. If every item of inventory was processed at exactly the same rate, inventory turns would be the number of times per year you sold out your stock and had to replenish it. Inventory turns is a measure of how many times inventory turns over in a year.
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