Types of Inventory You Need to Know, How to Calculate Inventory Turnover Ratio

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Types of Inventory You Need to Know

Inventory management is responsible for overseeing the products available in stock and outflow and inflow. Inventory management ensures that there are no excess units or small amounts in storage so that the company's performance should not be in danger. The main function of inventory is to provide a sustainable supply of materials for operations. To achieve this function effectively, companies must strive to find a point of difference between too much and too little, without ever running out of stock. This management will increase cash flow and profitability, as well as keep the company running smoothly. Effectively managed inventory management will make the company run according to a mature production plan.

The main goal of inventory management in the company is to keep the inventory stored sufficiently stable, so as not to interfere with the production process. In inventory management science, not only to manage some inventory but also defective goods or do not pass SOPs, spare parts and inventory memos.

Here are the types of inventory that need to be known, including:

1. Raw Materials (Raw Goods)

Raw materials are one of the first types of inventory, raw materials are mandatory materials and must exist because without raw materials, finished goods will not be completed. Inventory management must also ensure the stock of raw materials for the production process.

2. Goods In Process (Semi-Finished Goods)

Not a few companies will send a semi-finished item or goods in this process to other factories to be able to continue to be finished goods. This inventory management will take into account how much the goods in this process are passed on in order to meet market demand and in accordance with the production schedule.

3. Finished Goods

In order for a company to get maximum profit, inventory arrangements need to be carried out carefully and based on market conditions, internal or external. After the finished goods, it needs to be sent or distributed to third parties or agents who are already registered with the company.

4. Goods Supply

A person who is in charge of being able to manage inventory must of course be good at managing all inventory used for production or not.

When viewed from the demand side, inventory management is divided into two, namely as follows:

a. Raw Goods and Semi-Finished Goods

This type of goods depends on a production process not because of market demand or dependent demand inventory.

b. Finished Goods

Finished goods can be determined by market demand or independent demand inventory

How to Calculate Inventory Turnover Ratio

Inventory Turnover Ratio is an efficiency ratio formula that shows how effective an inventory can be managed by comparing This ratio is used to measure the average of inventory rotated in a period. That is, this ratio measures the number of times a company sells its average total inventory throughout the year.

This ratio will be a good indicator in determining the value of inventory quality and effective purchases in inventory management In this ratio there are two important components, first is the purchase of goods for inventory and the second is sales.

If the number of goods purchased is large, causing the amount of inventory to increase, then the company must sell in large quantities to optimize the performance of its inventory turnover.

Otherwise, inventory storage costs and other inventory handling costs will arise.

In order for inventory to rotate more effectively, sales must match the purchase of goods which is why those who manage purchases must be in line with those who manage sales.

To facilitate monitoring of this it is better to use.

Inventory Turnover Ratio Assessment

A high turnover ratio indicates that the company does not spend a lot of money to buy its merchandise and can optimize its expenses.

For investors, this ratio can be used to see and measure the liquidation of a company in question.

Because inventory is one of the assets or assets, especially for retail companies. This ratio measurement also shows how easily inventory can be sold so that it can be converted into cash.

1. Inventory Turnover Ratio Formula 

In this Turnover Ratio, there is a formula that needs to be understood, namely by dividing the Cost of Goods Sold for a period by the average inventory for that period.

Therefore, before doing the calculation, make sure to first know the calculation formula, the inventory ratio is:

Inventory Turnover Ratio = Sales / Average Inventory

In general, the average use of inventory from this formula is in lieu of the final inventory that fluctuates greatly throughout the year.

For example, a company will probably buy a fair amount of merchandise at the beginning of the year, and then will sell it in the following month so that the inventory at the end of the year will be small.

These conditions are inaccurate in reflecting actual inventory throughout the year. Therefore, it takes the calculation of the average inventory.

Average Inventory is calculated by adding the initial inventory and the final inventory, and then halved.

Average Inventory =  (Initial Inventory + Final Inventory) / 2

This Ratio Formula can also be written as follows :

Inventory Turnover Ratio = Sales / ((Initial Inventory + Final Inventory) / 2)

We're going to make a case:

A store that sells a computer then reports its cost of goods sold worth U$ 100 million.

The initial inventory of this store is worth U$ 300 million while the final inventory is worth U$ 200 million. Then, what is the ratio of the computer store?

Known,

Sales : U$100 million

Initial Inventory : U$ 300 million

Final Inventory : U$. 200 million

Inventory Turnover Ratio  = ?

So,

Inventory Turnover Ratio = Sales / (((Initial Inventory + Final Inventory) / 2)

Inventory Turnover Ratio = U$ 100.000.000,- / ((U$ 300.000.000,- + U$ 200.000.000,-) / 2)

Inventory Turnover Ratio = 0,6 river

So, in this Mobile Store Inventory Turnover Ratio is 0.6 times.

• Make sure to find information according to statistical data with your industry field this is because so you can see how your company ranks in terms of inventory turnover compared to competitors in the same field. The best recommendations are recommendations suggested by the accountants in your company, later these accountants will provide information related to whether the inventory turnover figures in your company are good or not.

• And don't forget to make sure that the Cost of Goods Sold and the average inventory are determined to match the appropriate calculation basis.

Therefore, for those who have a purpose to attract investors, use it as a liquidity gauge in your business.

This is because inventory is a company asset, especially for those engaged in retail as mentioned above


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