![]() This is because inventories are stored at cost price. Note that instead of Sales, Cost of Goods Sold is used to calculate this specific turnover ratio.Average Inventory = (Beginning Inventory + Ending Inventory) / 2.Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory * This article explains the inventory turnover ratio in detail. Hence, the inventory turnover ratio is amongst their favorites. Since inventory is such a make or break item in the financials of a company, there is obviously an interest amongst analysts and investors who want to have a close watch on its performance. Many years later, Michael Dell revolutionized the computer industry with his made-to-order business model that enabled him to function with zero inventories and earning almost double the profits that entrenched competitors with deep pockets could manage. Japanese companies showed how they could produce efficiently at lower costs by implementing Just in Time inventory systems. The idea that inventory should be minimized if not eliminated caught the fancy of management gurus from 1980s onwards. ![]() ![]() Not only is capital locked in inventory creating an opportunity cost, there are other costs involved like warehousing, security, insurance, pilferage and so on. Until earlier it was known as the necessary evil. This is because inventory has many costs associated with it. The systems of the company must be so efficient that goods are available for sale as and when required and spend the least amount of time waiting in a warehouse. A company is said to be more efficient when it keeps the least inventory on hand to make the sales it does. ![]()
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