Cash management is a vital part of every business, in the current economic climate it has grown even more in significance and stock is an area which needs to be closely monitored as it can soak up a large part of the businesses working capital. The management of stock appears to tread a fine line between having the right stock/quantity available to meet production requirements and minimising the stock held, the cost of holding too much stock against the cost of production downtime through not having stock available.
Businesses can measure aspects of their stock management by using two ratios, one will show how many times the business has sold the value of it's stock during the year,the higher the figure the better as this means that money is tied up for less time.
cost of goods sold = stock turnover ratio
av. stock during period
The second ratio gives the average number of days that money is tied up in stock, the lower the number of days the better for the business.
av. stock during period = stock turnover ratio (days)
cost of goods sold / 365
By calculating these ratios they can be used to measure movement over periods (is the ratio getting better or worse) it can also be used to benchmark against other businesses in the same industry.
Possible causes of low stock turnover :-
- too much stock being carried
- low volume of business
- poor inventory management
- holding obsolete stock
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