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Inventory turnover is the rate at which a company replaces inventory in a given period due to sales. Inventory-based businesses know that when you carry a lot of inventory, it soaks up a lot of your cash.
The higher the inventory turnover, the better because it means you are selling your products quickly and there is a demand for them. On the other hand, a lower inventory turn means weaker sales and lower demand for what you’re selling. Your inventory should match your sales since it’s costing your money to hold onto inventory if it’s not being sold. It’s widely known that you should turn your inventory as fast as possible How many times should your inventory turn in a given year? That answer depends on the industry you’re in.
For example, when Steve Jobs was running Apple and Tim Cook came on as the COO when the iPhone first came out, his job was to get the operations, manufacturing and everything that involved the iPhone to run smoothly and efficiently. At the time, the number one selling phone in America was the Motorola flip phone and it took Motorola about 15 days to go through their entire inventory which is extremely fast. Tim Cook thought about that number and realized it wasn’t even good enough for Apple. Apple was able to get it down all the way to four days selling their iPhone! They had four days of inventory on-hand which means they had 25% of the cash tied up in inventory compared to Motorola. Apple was able to take that cash and deploy it into marketing, sales, branding, and everything that has made the iPhone the amazing success that we know it as today. And it all started with getting it down to where Apple’s inventory on-hand was so low, that they could deploy their cash into other things, avoid financing 75% of their inventory and paying interest costs on top of it.
It may not seem obvious, but the faster you can turn your inventory, the more cash you’re going to have and the less interest costs you’re going to have to pay. As a result, you’re going to become more profitable and think of what you could do with all those dollars to boost your product, your margins and ultimately fulfill on your goals.
This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.
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Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”
