Turnover analysis is a technique a business uses to ensure that its inventory is at appropriate levels to cater to customer needs while keeping costs as low as possible. While calculation of the inventory turnover ratio may give a general indication of the adequacy of turnover levels and rate at which inventory generally is turning over, turnover analysis goes deeper into the situation. In turnover analysis, the turnover of each item or group of items in the inventory is analyzed separately to highlight the particular products of groups that may be overstocked. This may lead the business to reduce stock levels for those products and release the resulting cash for other purposes.
Turnover analysis would proceed by looking at each product line or group in terms of the number of items in stock, the number of items sold during the period under examination and the number of days worth of sales of that particular item left in stock. This analysis may reveal that certain items are selling quickly and the stock levels should be increased, while other products are moving slowly and the business could save resources by reducing inventory levels in those product lines. By taking action to reduce inventory in the appropriate lines, the business may reduce the costs of keeping inventory and improve cash flow for the business.
A rough check on inventory levels, such as the ratio of inventory to sales, may give a general indication of the inventory turnover but, without further analysis, this ratio makes the assumption that all products sold by the enterprise are the same. In reality, very few business sell just one product, and even within one product description there will be different levels of price and quality that may give rise to the need to hold different levels of inventory for each item. These items will be turned over at different rates. Turnover analysis is detailed enough to enable the business to take specific actions to improve efficiency.
Turnover analysis requires a business to keep detailed information about stock levels and sales of particular items. Larger business may have software in place that can capture the information and track individual product lines through the business. For smaller businesses, turnover analysis may require a physical count of inventory at regular intervals and a more detailed analysis of sales than otherwise would be required. Whether this can be done in practice will depend on cost considerations, but the efficiency gains achieved through turnover analysis may mean the procedure is worthwhile for the business.
