What does the term "inventory turnover" indicate?

Inventory turnover is a key performance metric that measures how quickly a company sells its inventory and how often that inventory is replaced over a specific period. A higher inventory turnover ratio indicates that a business is efficient in managing its inventory, as it shows that products are sold and replenished regularly. This metric helps businesses understand their sales performance and inventory management effectiveness.

The focus on the rate at which inventory is sold and replaced is crucial for maintaining optimal stock levels, minimizing holding costs, and ensuring that capital is not tied up in unsold goods. Businesses aim for a healthy turnover rate to align supply with consumer demand, thereby optimizing profit margins.

In contrast, the frequency of inventory audits pertains to the monitoring and assessment processes used to ensure accuracy in inventory records, while the total value of inventory held simply reflects the monetary worth of inventory and not its movement or efficiency. The average number of suppliers indicates supply chain diversity but does not relate to how quickly products are sold. Understanding inventory turnover allows businesses to make informed decisions regarding purchasing, production, and sales strategies.