Inventory Analysis : Inventory management KPIs

 INVENTORY ANALYSIS 

Inventory management KPIs to improve 

Advisors and business owners can adopt several universally accepted inventory management ratios and KPIs (key performance indicators) to help them monitor the business.

Extracting, analyzing, monitoring, and reacting to relevant inventory ratios can help a business improve its performance, cash flow and profitability.

5KPIs

Inventory management KPIs can be compared to external industry standards, where available; However, it can often be difficult to find suitable comparisons. Many small-to-medium-sized businesses will need to define their own ratios and KPI goals, and rely on using them to monitor ongoing performance. In addition, they would benefit from classifying inventory and analyzing group performance. For example, a shop that has fast-moving (such as fresh food) and slow-moving items (such as a notepad) will have a richer understanding of the performance of their inventory if they define the inventory by performance within their category and Let's analyze.

Here I explore five ratios and inventory management KPIs, explaining what they are, how to calculate them, what they indicate, and how they can assist in managing the businesses inventory.

1. Inventory turnover 

Inventory turnover is a measure of the number of inventories sold and replaced over a one-time period. This ratio is calculated by dividing sales by inventory. The time period is usually one year, but may be shorter.

Inventory churn analysis helps a business to plan at all levels of its income statement. This allows a better forecast of the cash potential needed to realign inventory in the coming months based on past performance

This allows one to identify underperforming sales lines and products so that those products can be moved more quickly, either through specials or focusing on products that may have previously been neglected.

In return, we will free up cash flow for higher or better products. In this, we have a good relationship with inventory and supplants if we pay attention to the fact that the cost of transposition is work power and allows to consider the capacity of inventory storage.

2. Average days to sell inventory 

The average day to sell inventory is a measure of how long a company takes to buy or create inventory and convert it into sales. The list of average days for sales is calculated as the number of days of the year multiplied (inventory divided by cost of sales).

The average days to sell inventory ratio informs the business owner how long it takes to sell each item of inventory, on average, over the days.

for example:

To describe the sales of days in inventory, assume that a company's inventory turnover ratio was 9 in the previous year. Using 360 as the number of days in a year, sales of company days in inventory were 40 days (360 days) divided by 9). Since sales and inventory levels usually fluctuate over the course of a year, 40 days is the average from the previous time.

It is important to realize that financial ratios will vary between industries. Therefore, the ratio of a company should be compared to its previous financial ratio and the ratio of companies within its industry.

Conclusion

Many other ratios and KPIs are related to inventory speed, such as inventory accuracy, fulfillment cycle time, timely delivery, and cost per order. Regarding your business model, embrace the optimal combination of inventory management KPIs to analyze. Work with your accounting and order management system so that you can easily extract the main data needed to calculate this information.

 3. Average inventory

Average inventory is the average value of inventory over a set time period. The average inventory ratio develops seasonal fluctuations, thereby normalizing the data effectively. This is an indicator of how fast the inventory is selling, and the average volume is on hand. A fluctuation can highlight issues with a purchase or sale.

4. Inventory write-off

Inventory represents write-off inventory that no longer has any value in business (as opposed to write-offs where inventory value has been reduced). Inventories can be written off due to technical obsolescence, theft or damage. Inventory write-offs are only to be written down to the dollar value of the stock. This can be allocated towards the cost of the Goods Sold Account, but it will distort the gross margin percentage. My priority is to separate it by allocating it to the write-off account.

Inventory write-off value shows how much inventory writing is going to cost. If level is concerned, further investigation as to why write-off is necessary and corrective action may need to be taken.

"Every growing business should have a process of identifying or scraping some of those items to identify slow or non-salable products and to make room for more profitable products."

5. Holding Costs

There are different types of inventory costs. Some include the cost of placing an order, the cost of holding and the low cost. Once you understand that each of these costs apply to your business, the next step is to determine the best way to value your list. An evaluation method is used to determine the profit of your business.

So how do you decide which cost method is best suited for your business model? How do you ensure that you are accounting for all inventory costs?

Holding costs (sometimes referred to as carrying costs) are costs in storing and maintaining inventory. They can include insurance, costs associated with space housing stock, security and related equipment and labor costs.

For example, as inventory levels fall due to seasonal fluctuations, it may be worth considering renting additional storage space to help cover holding costs.

You can engage a business to manage inventory for you, and understanding your holding costs will help you evaluate your options and decide on a suitable business model for inventory management.