Turnover analysis helps you decide if your investment in a particular inventory item or in a group of items is excessive, too low, or just right. From a cash flow perspective, performing turnover analysis is particularly useful for finding inventory items that are over-stocked. Remember, an excess investment in inventory results in less cash available for other cash outflow purposes, such as paying bills or meeting payroll. Pinpointing inventory items held at excessive levels, and reducing those levels helps reduce your total investment in inventory. Reducing your total investment in inventory helps improve your cash flow.
Performing turnover analysis requires you to look at each individual inventory item for the following information:
- the number of items currently held in inventory
- the number of items sold during the measurement period (expressed in days, generally 30 to 60 days)
- the number of items held in relation to the measurement period
Once the information is compiled for each inventory item, you can then determine if the level for each item is excessive, too low, or just right. In some cases, you may want to save time by using departments or product lines rather than individual items for your initial turnover analysis. If you find a department or product line that's causing trouble, you might go farther and do a turnover analysis of each item in that grouping.