Question

Why is it desirable to increase a company’s inventory turnover ratio?

Short answer

It is desirable to increase its inventory turnover ratio to achieve more sales from a specific amount of inventory.

Step-by-step solution

Inventory turnover ratio

The inventory turnover ratio signifies how fastly goods that come into storage or warehouse facilities leave storage facilities. The financial metrics signify how many times throughout a particular period the company converts its inventory into cash for the business.

Inventory turnover ratio= cost of goods sold x 2/ (Beginning inventory +Final inventory)

Desire to increase a company’s inventory turnover ratio

1. The inventory turnover ratio helps in better forecasting the futuristic demand of the product.
2. The inventory turnover ratio helps in reducing the price of the product.
3. The inventory turnover ratio helps increasethe sales of the product as we can better forecast demand.
4. It helps the manager to keep the focus on top-selling products.
5. Throughtheinventory turnover ratio,we can eliminate safety stocks andold inventory.
6. Purchase managers can reduce the purchased quantity for the particular stocks based on their demand.
7. Inventory turnover helps better order management as per needs and demand.
8. It also helps in better inventory pricing.