What is stock turn and why is it important?

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24/07/2018

Critical for any business that has products like retailers, stock turnover – or ‘turn’ – tells you how often your products are being sold over time. It’s the same if you manufacture and have raw materials: your business is working harder the faster you buy, sell and replace stock.

Why is it important?

It’s a signal if your business is performing better or worse to allow you time to take action

If stock turn is slowing down then:

• There may be large amounts of obsolete stock or raw materials that no-one wants, or you can’t use. It probably incurs storage costs and it’s cash tied up in products you could better use elsewhere.
• You (or someone) is over-ordering and you’re building up a stockpile of unnecessary product.
• Sales have slowed and you’re ending up with spare product or raw materials.
• There is an issue with shrinkage (either wastage or theft).

Actions to reverse this trend would include conducting a stock audit to detect unsold stock and then get rid of it (often by discounting), using stock inventory software (if you don’t already) to track what’s not selling, tightening up on security on who has access to what.

If stock is increasing then:

• Sales are increasing faster than buying.
• You’re not holding onto inventory that can’t be sold.
• It shows that your marketing is working, since you can clearly sell the stock you’re buying.

Actions to encourage this trend would include checking you’re not running out of materials, and your capacity and delivery times to customers are still the same.

Working it out

Stock turn is usually calculated by using what stock you started with, minus what you end up with (the cost of goods sold or COGS) over a given time period, divided by the average stock level during that period. If you’re not using an accountant, there are a number of online tools that will help you to calculate stock turn, as well as websites that provide step-by-step instructions like Wikihow.com.

Turnover = Total Cost of Goods Sold / Average Inventory

There are a few things to keep in mind when calculating turnover rates:

• The COGS figure in the formula should include products used for internal purposes such as repairs and assemblies.
• Inventory turnover is based on how much you paid for them, not what you sold them for.
• Set the same time period like over three months, as once a month may not allow for seasonal fluctuations, and once every twelve months doesn’t give you enough warning to make changes.

Reduce holding costs, increase profits

In the past businesses may have held large amounts of stock so they’d never run out, or be able to offer a wide selection. Sometimes suppliers would offer incentives to buy in bulk to receive a volume discount which would increase your margin, or have minimum orders.

However this is not as critical with the ‘just in time’ principle (where you only buy what you need so it arrives just in time when you need it). Advances in delivery, online ordering and manufacturers able to offer smaller production runs with automated machinery, has made it easier and easier to reduce the stock you hold.

Which lowers all your costs. You could spend less on rent, utilities, insurance, theft and other costs of maintaining your stock or raw materials.

Summary

It’s not feasible to stock a lifetime’s supply of every item, which is why you need to be careful and practical about your ordering (especially for seasonal businesses). To pay your bills and see a profit, you need to sell what you’ve bought, ideally faster and faster. The stock turn rate measures the rate you move inventory from your storeroom to the customer.

Plus when you combine stock turnover with other business metrics such as customer service and ROI, you’ll get a much clearer and more accurate picture of business performance.

Next Steps

• Conduct an audit of your inventory or raw materials: even the ‘dust test’ is valid (run your hands over stock packaging to detect how long it’s been unopened).
• Adopt a mechanism to measure and report on your stock turnover (software is best), and access this info on a regular basis.
• Make sure everyone in the business understands why increasing stock turn is important, and what they can do to improve it.