What is the significance of inventory turnover?

Inventory turnover is a critical metric in assessing the operational efficiency and effectiveness of a company's inventory management. It measures how often inventory is sold and replaced over a specific period, typically a year. A high inventory turnover rate indicates strong sales and effective inventory management, meaning that products are being sold quickly and efficiently, reducing the holding costs associated with excess inventory.

This metric allows companies to assess how well they are managing their stock levels in relation to sales volume. If a company has a low turnover rate, it may suggest overstocking, outdated inventory, or poorer sales performance, prompting a need for strategies to enhance sales efficiency and optimize inventory levels. Hence, understanding inventory turnover is essential for informing decisions related to purchasing, marketing, and cash flow management.