One of the most complex tasks of business management is calculating the average stocks that you hold in your warehouse. It does, however, constitute a very important phase in order to achieve adequate profitability of the company and the appropriate strategic choices. By following this simple guide it will help you calculate the index of stock rotation in the warehouse in order to manage them better, avoiding conditions of excessive or poor production for your business. This parameter is normally calculated on an annual basis.
The rate of inventory turnover can be calculated in physical quantities or values (expressed in the currency of reference). In the first case it is necessary to calculate the ratio between the quantity discharged from the warehouse in a given period under consideration, and the average of the stock obtained in the same period. The number derived from this arithmetic operation will indicate the number of times that the units held in the media have been sold and then re- acquired for resale.
The rotation index values is instead calculated as the ratio between the cost of goods sold and the cost of average inventory, where the cost of goods sold is obtained by adding to the cost of the initial amounts, the cost of goods purchased during the year and subtracting the cost of closing inventories. Instead, the cost of the average stock is the average monthly cost of closing inventories of stock (average performed by placing 13 in the denominator, given that you also take into account those held at the beginning of the first month).
In the management company if the rate of inventory turnover is low, it can lead to problems related to poor handling of inventory, which may also lead to other problems in cash flows. If, however, the rate of inventory turnover is a large number, this means that there is a very substantial risk of lack of goods to sell. This tool is ideal to also calculate and identify what type of goods can be sold, which remained in the warehouse and for assessing the relative risk of asset deterioration of the same.
In the case of companies that produce goods with perishable materials it is necessary in fact, that the rate of inventory turnover is very high compared to another type of treated products. This index must also be calculated according to well placed observation. It is also essential to consider the time in which the goods remain in the warehouse, and the time in which there is a reordering of the products to improve business efficiency. This method is widely used by large businesses and medium retailers, but you can apply it even if you have a small business, even a family one, to better manage all your stocks.