If you sell stock or inventory, it’s essential you understand stock turn and how to increase it.
Obsolete, or ‘dead’ stock will harm your cash flow and your ability to increase profit, particularly in a slower-moving economy. The longer stock takes to sell, the longer you have your cash tied up in the stock before it can be sold for a profit. The older the stock, the less likely it is that you’ll be able to sell it for its original retail price.
Use the below formulas to calculate your stock turn:
Stock turn = cost of sales / average stock held
To calculate the cost of sales: opening stock + annual purchases - closing stock (where purchases include all variable costs that show in your trading account).
To calculate your average stock:(opening stock + closing stock) / 2.
For example, where your cost of sales is £150,000 and average stock is £45,000, your stock turn will be 1.33 (£150,000 / £45,000). This means that on average, you sell each item of stock 3.3 times per year.
So, how do you increase your stock turn to sell items faster, free up cash flow, and increase your profit, particularly in the current economy?
“The difficulty lies not so much in developing new ideas as in escaping from old ones.” - John Maynard Keynes
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