Industry dynamic — What is the inventory turnover period? What is the significance of the inventory turnover period

What is the inventory turnover period?

Days of inventory turnover (Days sales of inventory) refers to the number of days an enterprise experiences from the time it acquires inventory to the time it consumes or sells it. This is calculated by the ratio of the cost of sales to the average inventory over a period of time (usually 1 year). Fewer turnover days means inventory is being realized faster. The shorter the inventory takes up funds, the more efficient inventory management is.  

What is the significance of the inventory turnover period? 

Fewer days of inventory turnover indicates that the more inventory turnover, the less average inventory. However, too little inventory can not meet the needs of circulation, so inventory turnover days are not the less the better. But that’s not to say that the more days inventory turnover the better, because too much inventory will take up too much money, resulting in waste of resources. Under certain production and operation conditions, the enterprise has an optimal inventory level. The number of days of inventory turnover plus the number of days of accounts receivable turnover minus the number of days of accounts payable turnover results in the company’s cash flow cycle as an important indicator.

The number of days inventory turnover represents the average number of days (average occupancy time) of inventory turnover from record to write-off in a fiscal year, and the shorter the number of inventory turnover days the better. The more inventory turnovers, the shorter the turnaround days, and the fewer turnovers, the longer the turnaround days. The number of inventory turnovers represents how many times inventory has been transferred from record to write-off on average in a fiscal year. The more inventory turnovers the better.  

Inventory turnover analysis index is an index that reflects the operating ability of an enterprise, which can be used to evaluate the level of inventory management , and can also be used to measure the liquidity of an enterprise’s inventory. If inventory is marketable, the ability to cash out is strong, then the rate of turnover is high, Improve the inventory turnover and shortening business cycle can improve the realization capacity of enterprises.

The inventory turnover rate reflects the level of inventory management. The faster inventory turnover, the lower the level of inventory occupation, the stronger the liquidity, then the faster inventory converted to cash or accounts receivable. It not only affects the short-term solvency of enterprises, but also is an important part of the whole enterprise management.