Inventory Turnover
A ratio measuring how many times a company sells and replenishes its inventory over a period, indicating inventory management efficiency.
FAQs
What causes low inventory turnover?
Low turnover may indicate: overpurchasing (buying more than demand supports), demand decline (customers not buying expected volumes), poor assortment planning (holding wrong products), pricing issues (items priced too high to move), or long production cycles. Distinguish between intentionally slow-turn products (luxury goods, wine) and problematically slow-moving inventory requiring markdowns or write-offs.
How does inventory turnover affect cash flow?
Inventory requires cash investment — purchasing or producing inventory before it's sold ties up working capital. Faster turnover means less cash is locked in inventory at any time, improving cash flow. Slowing turnover absorbs cash (more inventory purchased but sitting unsold). Supply chain disruptions that force safety stock buildup can significantly increase inventory levels and drain working capital even when sales remain stable.
What is dead stock and how does it affect financial statements?
Dead stock is inventory that hasn't sold and is unlikely to sell at full price — due to obsolescence, seasonal mismatch, or demand failure. Under lower-of-cost-or-market (LCM) or lower-of-cost-or-net-realizable-value (LCNRV) rules, inventory must be written down to recoverable value, creating an inventory write-down charge on the income statement. Aging inventory (often revealed through slow turnover) is a leading indicator of future write-downs.
Related Terms
Days Sales Outstanding
The average number of days a company takes to collect payment after a sale, measuring accounts receivable collection efficiency.
Days Payable Outstanding
The average number of days a company takes to pay its vendors, measuring how efficiently a company manages its accounts payable.
Working Capital
The difference between current assets and current liabilities, measuring a company's short-term liquidity and operational efficiency.
Current Ratio
A liquidity ratio measuring a company's ability to pay short-term obligations using current assets, calculated as current assets divided by current liabilities.