When a company desires to increase turnover, it most likely means sales or inventory. These two business items have a very close and distinct relationship in a company. Increasing sales and inventory turnover means a company earns higher sales revenue and sells through its inventory more times in a single period. Ways to increase turnover may be discounting product prices, entering new markets, and reducing inventory held for sale by a company. Each of these methods provides a specific way for improving a company’s turnover.
Companies use a standard formula for calculating inventory turnover. The formula divides sales by inventory for a current period. In most cases, accountants compute this formula on a monthly basis. The formula also works on an annual basis, however. The income statement and balance sheet hold the essential pieces of information for the formula, with sales on the income statement and inventory on the balance sheet.
Demand is a main factor that drives a company’s sales. When consumer demand begins to lag for a company’s products, the company may be able to offer price discounts to increase sales. Ultimately, this option will reduce a company’s profitability on a product-level basis. The option does increase turnover as a company makes profit on volume sales rather than fewer sales with higher per-unit profits. The increase in sales, however, will increase the company’s turnover.
A second option to increase turnover is entering new markets. Many companies start by operating in local markets with immediate groups of consumers. Over time, however, sales may reduce as the immediate consumer group already owns the company’s products. Sales will drop, and turnover begins to decrease. Entering new markets allows the company to sell products in other states, regions, or international locations, increasing the company’s footprint.
New markets typically result in higher overall sales. The company’s customer base will increase turnover as new sales grow the numerator of the inventory turnover ratio. One consideration, however, is the cost of inventory for each new market. In some cases, a company may have to spend more capital for inventory, which will cut into the turnover ratio. Any uptick in costs must offset with increased sales in order to increase turnover.
A final option to increase turnover is reducing the inventory a company maintains in its warehouses. Lower inventory dollar amounts will reduce the denominator of the inventory formula turnover. Companies can reduce inventory by implementing a just-in-time system that orders inventory as needed. Another option is to constantly review inventory sales to ensure that on-hand inventory meets sales demands rather than exceeds sales.
