The Management of Inventory Turnover

Average turnover period = Opening days . Average Inventory Cost of Sales

What is crucial to assess is the trend !

Example :

Click here to see the source of data

Starworld Group	2020	2021	2022
Inventory at the beginning of the year	?	97	116
Inventory at the end of the year	97	116	151
Annual Average Inventory	?	106	133
Cost of sales	696	835	1086
Opening days	365	365	365
Average Turnover Period (Days)	?	47	45

 

Starworld Group	2021	2022
Purchases	854	1121
+ Inventory at the beginning of the year	97	116
- Inventory at the end of the year	116	151
Cost of Sales	835	1086

Note : The cost of sales depends on sales. So if the turnover in days is higher or lower

than 45-46 days, it will affect the purchases and therefore the CASH.

An increase of inventory turnover reduces the quantity of goods immobilized. That means less purchases and finally less payments to suppliers.

 

Sources :

Interpreting and using Financial Statements, 1999,Marc Bertonèche, Ph. D. in Finance from the Northwestern University, Professor at the Bordeaux University and at Sciences-PO Paris, Visiting Professor at Harvard Business School and Oxford University

Corporate Finance Course, Bernard Jaquier, Professor in Economics & Finance, Lausanne, Switzerland, 2023