Inventory turnover explained

Inventory turnover is an indicator of speed or velocity in a company: how quickly does a company turn its inventory into sales. How many times is the inventory sold or used in a year? Inventory turns can be a very meaningful metric for a retail company or an industrial company.

⏱️TIMESTAMPS⏱️
0:00 Why is inventory turnover important
0:33 Inventory turnover definitions
1:21 Improving inventory turns
1:56 Inventory turnover and asset turnover
2:18 Calculating inventory turnover example

Different companies and different people use different definitions of #inventory turnover. Rather than asking what is the “right” definition, I would like to ask: what is the most useful definition? A: Inventory turns as the ratio between Sales and Inventory, or B: inventory turns as the ratio between Cost of Goods Sold and Inventory. When you drill down into the components, you will see that the first definition has units sold times the selling price per unit in the numerator, and units in stock times cost per unit in the denominator. The second definition has units sold times cost per unit in the numerator, and units in stock times cost per unit in the denominator. As cost per unit divided by cost per unit equals 1, you are in this second definition basically just dividing units sold by units in stock, and those are the only two variables that can be influenced when you strive for improvement.

In my opinion, option A: Inventory turns as the ratio between Sales and Inventory, is the most useful definition. As a finance director in a company, you can help create value for this company by providing visibility of the drivers of this key ratio of inventory turns. The management team can then ask the right questions to drive results: How do we sell more units? How do we increase the price per unit sold? How do we optimize our supply chain so we have fewer units in stock? How do we work on productivity to lower the cost per unit? The second reason I prefer option A, is that it links closely to Asset Turnover (sales over assets) in the DuPont formula, a key business equation that every business and finance person should understand. If you prefer option B, then there are several videos available on other YouTube channels that take you through a calculation.

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[Gusen]

nice video. As for 2 optionos of inventory turns calculation more preferable option depends on our purpose. Option B is usefule to understand if the inventories are overstocked.
I absolutely agree that the option A is useful for management to understand which inventory gives more value.

[mishikaagarwal]

impressed by you and this youtube channel everytime

[AnilkumarGulia]

great video sir, thanks for the video

[Basu]

Great video. Please do a video where you you that 5-point example you mentioned

[Ease_]

Thank you so much for this wonderful session but here is my doubt why we count average inventory what is the significance

[nikhilsingh]

the definition seems right to me overall. however, I wonder if the example was correct?

you divided net sales by balance inventory at that point of time. The balance inventory could be anything, and should not determine the inventory turn. let's say I'm calculating the inventory turn at the end of the year, I had started with 10b worth of inventory, I did 200b sales, and for some reason at the end the balance inventory was worth 20b, let's say for example sake, the inventory turn has become 10 as per your example, but it should have been 20 isn't it?

[dolevmazker]

hi, what can i make of the metrics of inventory turns or stock days.
Is 11 turns good or bad?
Also, what does the stock days - (33 days in walmart), mean?
The calculation is explained really well and the use of a financial sheet helps with the example.

[UtubeRage]

Very nice video, quick and to the point. One question i have is, how can we use the stock days results to help us bring down inventory to 33 days like walmart has?

[DeepakSharma-fusk]

Thanks for the video. With 1st formula, How do you calculate the $43, 046 for start-up businesses? I mean should it your 1st buy value (opening inventory) or budgeted monthly closing inventory?

[mozpassion]

Hi, this is completely different from what I learn up to day, but I think is useful. could you make a video on ICR and DCSR calculations?

[smbdcry]

I suspect the units in stock is a constant number… otherwise if set there’s only one in stock in the inventory… the turnover rate can be crazy..

[Mike_Haze]

thank you for this video it just seem like there are to many formulas, what also confuses me while analyzing annual reports is Sales / accounts Payable
I keep seeing that you should subtract Sales AND Cash sales to get, Credit Sales, how exactly can you find "cash sales" on the Financial statements ? is this formula even relevant to the outsider?

[sultanzackie]

So is the higher the bettee or the lower the better ?

[KrishanSingh-gzop]

But, how the data from the balance sheet (about inventory) & income statement (about sales or COGS) can show us how many times the turnover has happened? What's the logic behind it? What if a company says that it's turnover is more or less than what is calculated using sales or cogs / inventory?.