Cost of goods sold (COGS)Ĭost of goods sold, commonly known as COGS, is essential information for businesses and investors. Understanding these two variables is key to helping managers make decisions about purchasing, production scheduling, and other areas of operations.Ī strong understanding of the inventory turnover ratio can help a business increase profits by streamlining its processes and ensuring the right amount of product is available when needed. COGS reflects how much was spent on inventory to make or purchase items for sale, while the average list shows how much was held in stock. The two components of the inventory turnover ratio are the cost of goods sold (COGS) and average inventory. The inventory turnover ratio measures how quickly a business produces and sells its products – the higher the ratio, the more efficient the operations. Understanding the components of the inventory turnover ratio is an essential part of financial management. Understanding The Components Of Inventory Turnover Ratio Knowing this ratio is key for any business better to understand its performance and plan for future growth accordingly. Conversely, a low inventory turnover ratio indicates that the company is not effectively utilizing its resources, which can significantly impact its bottom line. This ratio can be used to evaluate how well a business manages its stock, reflecting its ability to produce income from sales and determine its liquidity status.Ī higher number means that the business rapidly sells off products, making it more efficient and profitable. It looks at how quickly a company has sold off its stock to make new orders to maximize profits. The Inventory Turnover Ratio is a financial metric used to measure the productivity of a company’s inventory. Read on to unlock the secrets of inventory efficiency! What is Inventory Turnover Ratio? In this post, we’ll explain everything you need to know about understanding and utilizing inventory turnover for your business. With an understanding of this efficient process, any business can learn to better manage its stockpiles and create a successful and streamlined inventory plan. The answer lies in comprehending a key metric known as inventory turnover. Do you ever wonder how businesses can keep up with inventory demands without overstocking? Have you ever noticed that some businesses always have the right product on hand while others seem perpetually out of stock?