Stock Turns Example
Although, the amount of inventory to be kept at any point in time is ambiguous, the stock turn ratio is a metric for determining inventory usage. Inventory usage is calculated as a ratio of sales turnover to the average inventory.
For the purpose of illustration, let £1,000,000 be the annual sales turnover and £500,000 be the average inventory; obtained from profit and loss statementand balance sheet report.
Inventory Turn = Sales turnover (divided by) Average Inventory
= £1,000,000 (divided by) £500,000
If through better inventory management and financial analysis, the inventory turn is increased to 10.
Average Inventory = Sales turnover (divided by) Inventory Turn
= £1,000,000 (divided by) 10
Reduction in inventory = £500,000 - £100,000
The implication therefore is that you can generate same sales with only £100,000 of average inventory.