This is number of times that a fixed dollar inventory will sell, turn over, in a fixed period of time.
This is usually calculated, and planned, on a six month period.
This is critical to maintain a fresh flow of inventory, keep aged goods out of stock, and. very important, to maintain a proper cash flow.
If inventory does not turn at a proper rate, it will build into an overstocked position.
If that happens, you need additional capital in order to pay bills and/or buy new merchandise.
If you don't know how to calculate Turnover, here it is.
Take the beginning inventory at Retail Value, say, January 1.
Add to that the Beginning Inventory on Feb. March, etc, for a period.
If you do this for 6 months, January - July, you have the beginning inventory for 6 months.
Then you add the Ending inventory for July.
If you do it for 1 year, Jan.- Dec. you also add the ending inventory, Dec.
For a 6 month period you have 7 inventory numbers.
Divide the sum of those by 7, for an average.
For 12 months, you have 13 inventory numbers.
Divide the sum by 13, for an average.
In either case, divide the average into the net sales for the period.
This gives you the number of times that the inventory turned.
This should be done in your original plans, then compared to actual as time passes. It can be done for any period of time, but too few months will not tell you much.
Not only should this be done on total inventory, but on each assortment of the inventory. This allows you to plan into a season, and out of the season, especially for fashion and seasonal goods.
Consider any holidays, where you must plan
in and out, Quickly.
This assures adequate cash flow to purchase new seasonal goods.
Your investment is earning maximum return.
Now, how to do this is different for different businesses.
I can't give you much specifics here for planning, but, it's critical to know your Delivery Time. For initial seasonal purchases and reorder time.
This is briefly the following plan.
This is done for each month.
Planned Beginning On Hand.
Planned Ending OH.
The second month follows the same pattern, etc.
The ending inventory of last month becomes the beginning inventory of the next.
You must plan the beginning on hand, including any actual inventory.
You must plan the estimated sales.
You must plan the ending inventory.
Now you can plan the deliveries/purchases for each month.
Add the Beginning OH, plus the Planned Ending OH, Less the Planned sales.
This is the amount of Purchases necessary in order to meet the plan.
Once this is done for each month, with careful consideration, you can calculate the turnover by the aforementioned method.
If the turnover is comparable to your industry standards, you may be OK.
If the turn is too high, you'll always be out of goods, or, best sellers and or basic goods. Bread and butter goods, if you will.
If the turn is too low, you'll be overstocked. Cash flow problems.
Once a plan is acceptable, you NEVER purchase all the planned purchases at one time.
Again, purchases depends on delivery time, and peak months or slow months.
Always leave some deliveries open. This makes the plan flexible.
To calculate your Open To buy position at any time, do this.
Take the beginning inventory
Add the goods ON ORDER.
Add the planned ending inventory.