Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsUsing Numbers to Manage InventoryDays Inventory RatioThis ratio reveals how well your inventory is being managed. It is important becauseit will indicate how quickly inventory is being replaced, and the more times inventorycan be “turned” (replaced) in a given operating cycle, the greater the profit.Days inventory ratio is calculated as follows:Days inventory =Inventory on handCost of Goods Soldx 365Adam’s Computer BagsDays inventory = RM 3,120 x 365 = 36.5 daysRM 31,200This calculation shows that, on average, Adam holds his inventory for 36.5 days.Inventory TurnoverThis calculation shows the effectiveness of your planning of inventory holdings. Alow inventory turnover rate will show that you are not moving inventory, which couldlead to excess or old inventory and, of course, higher holding costs. A high inventoryturnover rate could indicate that you run the risk of not having adequateinventory on hand to supply customers’ needs.Inventory turnover is calculated as follows:Inventory turnover =Cost of Goods SoldInventory on handAdam’s Computer BagsInventory turnover = RM31,200 = 10 timesRM 3,120This calculation shows that, on average, Adam turns his inventory over 10 timesper year.The days inventory and inventory turnover calculations should be comparedwith industry average to provide useful information. Comparing these measuresregularly with previous periods in your business will also provide information onthe effectiveness of inventory management within your business.53Chapter 2-5 p22-65 Eng.indd 538/15/11 5:01:57 PM