Managing inventory proves to be a challenging task for many managers and requires knowledge of inventory accounting basics. While the level of inventory varies from business to business, a reliable way to tell your inventory turnover rate is to utilize inventory turnover calculation measures.
The inventory turnover ratio tells you how liquid your inventory is- or how quickly your inventory can be converted into cash.
This ratio measures the number of times (on average) that your inventory is sold during a given period. It also measures how quickly your inventory can be converted into cash.
The inventory turnover ratio is calculated one of two ways. The most common way to calculate the ratio is:
The second and more accurate way to calculate the inventory turnover ratio is:
The second calculation is more accurate because "cost of goods sold" reflects your inventory's book value, and by averaging the inventory, you can reduce seasonal factors that influence the flow of inventory.
Generally, a high inventory turnover ratio means that your products are selling well. But before you get too excited about a high ratio, you need to compare it to the industry standards. If your ratio is higher than other companies in your industry, it could mean that your inventory management systems are ineffective.
Download "Inventory Turnover Ratio" white paper
No one is immune from the affects of climate change. Every industry is going to feel the impact of the changing environment, and in one everyone is contributing to the changes.
Let's look at the use of paper as an example:
On average each person uses 10,000 sheets of paper- that's 20 reams of paper or 1 and 1/5 of a tree per year. (conservatree.org) That doesn't seem to be that much, but for an office of ten, that's 12 trees a year. An office of 50 uses 60 trees. A large business company of 500? That's 600 trees a year. We don't have to keep doing the math to figure out that it starts adding up after awhile.
It's easy to say cut down the amount of paper you use, but how exactly do you do that? Finding the right marketing management software, mapping software, memory software, Microsoft accounting software, leaning manufacturing software (you get the picture) can cut down on paper consumption and make your business run faster. Not only that, but the right software can streamline your operations and improve efficiency by elimination paper forms. Financial management software allows you to submit and review forms electronically, getting rid of the hassle of having to dig through stacks of paper, or worse - losing the paper all together.
There are a lot of great software systems out there that allow you to create invoices, prepare estimates, issue purchase orders, review pricing, manage inventory, update data, and create and edit invoices electronically.
Finding the benchmark right software can do a lot for your business and help the environment. To find the right software for your company, check out the Software Selection Guide.
If you're ready to go completely paperless- check out 6 Tips For A 'Paperless' Office
photo credit: House of Sims
Fish can only be out of water for a few minutes before they stopping flopping around and start to dehydrate. The same holds true for a business without cash. Much like fish need water; your business needs a sea of cash to survive.
Businesses require a steady stream of cash moving in and out of the business in order to function from day to day (ie Cash flow).
Cashflow is used to measure your business' financial performance and is crucial in order to be solvent. Cash doesn't include your inventory, accounts receivable, or property. Even though all three of these can turn into cash, you more than likely can't trade excess inventory or the spare cubicle for goods or services.
Be careful not to confuse cash with profit. Why? Because profit is the money a business makes after accounting for all the expenses (In other words, it's what's left over after you have used the cash to pay the bills) Even if a business can forecast a profitable year, if there's no cash in the short term, the business is in trouble.
It's important that your business doesn't drowned in all the cash that's in the bank. Companies who pay attention to their cash flow statements know that if they have abundant cash on hand they are able to invest the cash back into the business in order to produce more profit.
Yes, knowing the entire financial health of your business is great, but there are times when all you want to know is your company's short term liquidity, and for that the quick ratio or acid-test ratio is where to look.
Here's what it looks like:
The quick ratio will tell you if your company is able to pay its short-term bills using your most liquid assets (cash, money in bank accounts, money market mutual funds, and US Treasury bills)
It's like the current ratio in the sense that it measures your ability to pay short-term debts, but it's more conservative of a measurement because it takes out inventory from your current assets. The inventory is subtracted from the current assets because some businesses can't quickly turn their inventory into cash. The current ratio can sometimes overestimate a company's ability to pay its short-term bills.
For example, if current assets equal $15,000 current inventory equals $6,000 and current liabilities equal $3,000, then quick ratio amounts to: ($15,000 - $6,000)/$3,000 = 3. Since we subtracted current inventory, it means that for every dollar of current liabilities there are three dollars of easily convertible assets.
Ideally, your company's quick ratio should be 1:1. The higher the ratio, the stronger your company is.
Learn more about inventory ratios. Download the Inventory Turnover Ratio white paper.