Inventory Turnover

This is a reprint of an article on Link

Why Inventory Turnover Is Important And How It Affects Your Profits

Posted on 27 January 2009 by Gary H
eBay Inventory Turnover

No matter where you live, if you walk through the business district of the nearest town and ask each succssful business owner what their inventory turnover rate is, they will likely be able to tell you right off the top of their head. The answers will vary, but if they’ve been in business for very long they will know what it is and you will get answers such as 3.7, 4, 5.2, etc.

They know because inventory turnover rate can determine whether a business just survives or flourishes; succeeds or fails.

What Is Inventory Turnover?

Inventory turnover rate measures how quickly you are moving inventory through your business.

In the simplest terms, inventory turnover rate is your cost of the product you sell over a twelve month period divided by your average investment in the product over the same twelve month period.

Lets assume that we have $6000 to invest in eBaysuccessful inventory and we spend it all on January 1st. At the end of the year, on December 31st we have sold it all for a gross profit of $12,000. We’ve turned or inventory over one time during the year. Our inventory turnover rate is 1.

But we don’t have to invest $6000 in inventory all at one time. If we invest only $3000 in inventory on January 1st, all other things being equal, we will have sold it all for a gross profit of $6000 by May 31st. Then on June 1st we invest $3000 using part of the revenue from the first half of the year. By December 31st we have sold that inventory for a gross profit of $6000.

At the end of the year we have still bought $6000 worth of inventory, still made a gross profit of $12,000, but we have invested only $3000. Our inventory turnover rate is 2.

What if we had only spent $1500 for inventory on January 31st and turned it over by March 31st? Over the year we would still have purchased $6000 worth of inventory, still made a gross profit of $12.000, but our investment would only be $1500. We would have turned our inventory 4 times.

Many people just beginning to seriously sell on eBay are trying to generate some extra cash to help with monthly bills or to build savings. They have limited funds available to invest in inventory. That doesn’t mean they can’t succeed. An initial investment of $500 in inventory that they turned 12 times would produce the same results as above on an investment of only $500.

Increasing your inventory turnover rate, combined with your return on investment and reinvesting part of your profits back into your business can grow your business exponentially over a short period of time.

Photograph by megan soh.