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
= 2

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
= £100,000

Reduction in inventory = £500,000 - £100,000
= £400,000

The implication therefore is that you can generate same sales with only £100,000 of average inventory.


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