Inventory Turnover:

A low turnover rate may indicate overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, sometimes a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.

Conversely a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low. This often can result in stock shortages.

An item whose inventory is sold (turns over) once a year has a higher holding cost than one that turns over twice, or three times, or more in that time. Inventory turnover also indicates the briskness of the business. The purpose of increasing inventory turnover is to reduce inventory for three reasons.

Items that turnover more quickly increase responsiveness to changes in customer requirements while allowing the replacement of obsolete items.

Increasing inventory turnover reduces holding cost. The store spends less money on rent, utilities, insurance, theft and other costs of maintaining a stock of items to be sold.

Reducing holding cost increases net income and profitability as long as the revenue from selling the item remains constant.

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