What is the stock turnover ratio?

Power turnover ratio is a standard financial calculation that determines how many times the company replaces its inventory to generate its current level of sales in a given period, usually 12 months. Formal calculations are divided by an average investment in the company's inventory during the year. The average inventory is calculated by adding the value of the beginning and the end of the company inventory in the year and its division of two. The stock turnover ratio allows the company to properly manage the level of inventory and determine how much of its cash should be tied in the inventory at one point. A bad decision can quickly lead to the end of business. Lack of liquidity means that the enterprise cannot respond to market opportunities or position to expand its market and increase revenge.

One of the key elements of allocating sources is inventory management. Inventory tends to be the only largest investmentthe company. Calculating the stock of the company's reserves allows you to understand how much stock should be on the shelf in each year all year round on the shelf. If the company buys all its inventory needs at the beginning of the year and slowly sells it during the year, its rendering rate would be equal to one. Although it seems to be a productive way to manage supplies by paying for all needs at the beginning of the year, it actually hurts business by not having to sell in the inventory by the end of the year.

It is a better procedure to determine the smallest amount of inventory that the business must hold at hand, and how many times it would have to replenish its stock for generating the same income as the purchase of all inventory at the beginning. Here comes the stock ratio. The ratio takes COGS and divides it with an average investment inventory per year. Thus, the formula allows the company to determine the largest number of inventory turnover that lasts during the year and still reaches the required level of income.

with a ratioInventory turnover can determine that the turnover can its inventory four times a year and still reach the same levels of income as if it has purchased, for example, all stocks. This means that society would have to spend only one quarter of its inventory budget at the beginning of the year. This releases working capital for society to devote itself to other initiatives instead of having cash on the shelves in the warehouse.