What Is Inventory Turnover?

Inventory turnover is a financial metric that calculates the number of times a company’s inventory is sold and replenished over a specific period, typically revealing how effectively inventory is managed and how quickly products are moving through the supply chain.

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Inventory turnover refers to the rate at which a company sells and replaces its inventory over a specific period, indicating how efficiently it manages its stock. A higher inventory turnover ratio suggests that a company is selling its products quickly, which can lead to reduced holding costs and improved cash flow. Conversely, a low turnover rate may indicate overstocking or weak sales, prompting the need for strategic adjustments in inventory management.

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Inventory turnover is a key metric for gauging business efficiency, directly affecting cash flow and operational costs. High inventory turnover rates imply effective sales and inventory management, which can minimize storage costs and reduce capital tied up in stock. On the other hand, low turnover rates may indicate excess stock, leading to increased holding costs and potential issues with outdated inventory.

For example, a retail business that frequently rotates its stock to match seasonal trends might see high inventory turnover, which reduces storage costs and maximizes revenue. In contrast, a business with a slower turnover rate might struggle with excess inventory, resulting in markdowns or waste if items expire or go out of demand.

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