Inventory Turnover Ratio Essay

Inventory Turnover Ratio:

A high inventory turnover ratio can suggest either strong sales or ineffective buying. A company could buy too often in small quantities. This could cause the purchase price to be higher.

A high inventory turnover ratio can indicate better liquidity, but it can also indicate a shortage or insufficient inventory levels, which may lead to a loss in business.

A low inventory turnover ratio suggests either excess inventory on hand or poor sales. A low inventory turnover rate can specify a poor liquidity, due to possible overstocking, and obsolescence. It could also reflect a planned inventory build-up in the case of material shortages or in anticipation of rapidly rising prices.

High inventory levels are typical unhealthy

When a company have inventory build-ups, they are generally not selling enough. This is not a good position as a company needs to turn over good inventory quantities to preserve reasonably high-profit margins and to avoid the costs and other difficulties that come with high levels of inventory.

• Lost sales

If a company’s inventory turnover is too high, it could have negatively affected their sales. Their suppliers could select to limit their range of products they keep to avoid an excess of inventory and to keep inventory moving through the operation. While other suppliers might rapidly sell the stock they have on hand, they may have difficulty keeping shelves full or may not offer a comprehensive enough range to meet customer needs.

Customers who cannot find what they're looking for or might not be impressed with the product combination might go somewhere else and may not return to the company.

• Higher

The longer the collection time it may lead to less cash in hand when bills are due. This will increases the pressure on the company to create restricted payment terms on debtors, which could including penalties for late payments. The penalties on late payments could have a harmful effect on the company’s relationships with some of their debtors who don't have cash to make prompt payments on account.

• Loss of trade discount:

A high current ratio, shows that the debtor’s accounts are not paid on time. This could have an effect on the trade discount which is only allowed if the company pays within a certain period of time.

• Hard to attract investors:

The current ratio helps investors and creditors to see the liquidity of a company and how easily the company can settle their debt.

The higher the current ratio is, the more positive it is to a lower current ratio because it shows the company can more easily make current debt