April 26, 2009 7:45 AM EDT
Maybe I am misunderstanding your question. Are you looking for a simple way to improve the number of inventory turns? Or, are you looking for a simple formula to calculate turns.
The standard formula for calculating turn over is:
Cost of Goods Sold (in a given time period) divided by the average inventory level represented in dollars for that time period. Some companies calculate based on a six month time period. Some on a twelve month period. A few companies do a daily time period.
COGS (your purchase prise) / average dollar value of on hand inventory
Let`s say your total cost (purchase price ) of goods for six months equals $15,000. Your average on hand inventory dollar amount for that same period equals $5,000. Then the formula would look something like:
$15,000/$5,000 = 3
that would be 3 turns in a six month period. This is a very basic formula and does not address several issues. One, low turn over rates in some industries can reflect a sick company that is not doing well. In another company, a low turn over rate on say heavy equipment sales may be the norm. Also, yearly turn over rates may not reflect seasonal changes that affect sales.
Another basic issue to consider is profit from investment. Is it better to purchase your product you will sell all at one time. Or buy product in stages to sell. Case in point, you have $15,000 to purchase do-dads for the year. Over the next year, you will sell all the do-dads and realize a profit of $3,000. Which option is better
1. Spend the entire $15,000 you have available all at one time for do-dads and realize a $3,000 profit. Thus realizing a $3,000 profit on your original $15,000 investment for the year.
2. Invest $7,500 upfront and sell off all the do-dads you can buy for $7,500. Just before you run out of stock, take $7,500 from those sales and buy more do-dads to sell. You will still realize a $3,000 profit by the end of the year. But, with option 2, you will realize a $3,000 on a $7,500 upfront investment. You will also have the other $7,500 of your original $15,000 you started with in the bank or to invest in something else.
But, as far as improving inventory turn, you can increase sales or decrease cost of goods.
nevadascul4/26/2009 1:16 PM
---The older we get, the more excuses we make for not chasing after our dreams. But truth is, goals are attainable at any age.