As someone who runs an e-commerce store, you'll know that inventory management is one of the biggest challenges a retail business owner can face. Predicting just the right amount of inventory to meet customer demands without going into excess is key to business optimization — making inventory turnover ratio one of the most important metrics to pay attention to.
Inventory turnover ratio is also an essential part of your financial statement analysis, as it is used to determine whether or not the businesses is running efficiently. Maintaining a good inventory turnover ratio will minimize dead stock, free up cash flow, and reduce overheads like holding and storage costs, which is why many retailers continuously strive to improve inventory turnover.
How to calculate inventory turnover
Inventory turnover represents how many times your average inventory has been sold or “turned over” within a specified time period. Usual accounting practice is to calculate turnover on an annual basis. However, you can also calculate turnover more regularly (for example, monthly or quarterly) to identify seasonal trends in your business.
The inventory turnover formula is:
As an example, let’s assume you’re calculating your annual turnover for 2020.
At the beginning of the fiscal year, you had $20,000 worth of inventory. By the end, you had $18,000. This makes your Average Inventory for the time period $19,000.
Your net sales (or Cost of Goods Sold) in 2020 was $50,000.
This makes your Inventory Turnover for 2020 = $50,000 / $19,000 = 2.63
In other words, you sold 2.63 times the value of your average inventory within the fiscal year.
10 strategies for improving inventory turnover
Based on the inventory turnover formula, there are two main things you can do to improve turnover:
- Improve net sales.
- Reduce average inventory.
Here are ten strategies to help your e-commerce business achieve better turnover and operational efficiency.
1. Leverage past data
Having a good inventory turnover ratio is about balancing supply with demand, which requires insight into customer behavior. And you don’t need a highly sophisticated system with predictive analytics to achieve this – we’ve created a forecasting spreadsheet template to help you estimate future sales and better manage restocking for improved turnover.
Save precious time on manual calculations with tons of inventory management apps that integrate seamlessly into your e-commerce platform and simplify things for you. Track sales across all your digital channels, forecast future demand, automate restocking, monitor your inventory in real-time, and make better strategic decisions for your business.
3. Monitor trends
Know what’s trending in your market to understand customer demand and respond accordingly. Staying up-to-date on e-commerce trends, whether it’s festive seasons like Valentine’s Day or Christmas, popular sales events like Singles’ Day or Black Friday Cyber Monday, or retail trends like subscription boxes, can help you adapt prices and inventory for better sales and turnover.
4. Use smart pricing
If you’re selling across different regions, having a single pricing strategy for all markets may not deliver the best results. Instead, consider multiple pricing strategies based on factors such as seasonal events, shipping costs, and purchase quantities.
5. Employ omnichannel marketing
Having a multi-channel approach to your e-commerce business is essential in today's digital-first market. This means making sure you're on social media, following SEO best practices, employing email marketing, investing in display ads, and more. You can streamline marketing for your e-commerce business with Shopify and create integrated omnichannel marketing campaigns with no experience needed to boost sales and visibility.
6. Improve shipping
As an online retailer, fast and reliable shipping is critical to your business success – 98.1% of customer say that quality of delivery impacts their brand loyalty, and 84% say they are unlikely to return to a brand after a poor delivery experience. Ensuring reliable shipping for your online store is key to improving customer experiences for increased sales and turnover.
7. Test new products in small batches
Expanding your product range is an excellent strategy for attracting new and return customers with fresh stocks and designs. But before committing to a bulk order, it’s a good idea to do a batch test on a range of new products first to see how your customers respond before doubling down on the ones that prove successful. It’s better to order smaller quantities and pay more per unit first than bring in too much inventory upfront without testing your market.
8. Explore no-inventory-required products
Encouraging customers to preorder is one of the best ways to increase turnover by locking in sales and ensuring that your inventory isn't too overstocked. Also, explore made-to-order products that can be produced on-demand (Printful or Printify) and dispatched quickly to your warehouse or even directly to your customers.
9. Consider dropshipping
Dropshipping is a method of retail fulfillment that doesn't require you to keep inventory on hand. Instead, you purchase the product from a supplier who then ships it directly to your customer. Dropshipping is a great way to decrease your upfront inventory costs and improve turnover.
10. Improve your online store
Want to improve sales? Make sure your e-commerce store is well-designed. Design can improve sales by lifting your brand credibility, ensuring that your products are well organized and searchable, and ensuring that your site is mobile-friendly – more than half of shoppers in Singapore shop on their mobile.
Common questions about inventory turnover
What does high inventory turnover mean in financial statement analysis?
What is considered a good inventory turnover ratio?
Why is it important to have a good inventory turnover ratio?
How Shopify can help you shift inventory
Improving inventory turnover is easier with Shopify. Start, grow, and optimize your online store with Shopify's complete e-commerce platform, which gives you a single dashboard from which to manage everything about your business, from marketing and design to inventory, payments, and shipping.
Monitor sales in real-time, automate inventory management and employ drop shipping to save on inventory costs. Expand your digital presence and sell more with multiple sales channels and a beautifully designed mobile-friendly store that you can build yourself.
Do all this, and more with Shopify's one-stop platform that easily integrates into your existing domain, requires no software maintenance, and gives you access to a network of trusted Shopify experts to further grow your business.