Sales turnover is an efficiency and productivity ratio. For example, if company A and company B have the same revenue but company B has twice as much average inventory in a given time period – this means that company A is more efficient and profitable. The time required to sell your inventory or the time it takes on average for the inventory to wait to be moved is an indicator of productivity and profitability.
It has an impact on profitability not only the management efficiency because inventory ties money in COGS and all the total cost associated with carrying and managing the inventory. Your goal should be to continuously monitor your sales turns and find way to improve – increase the sales turnover as much as possible.
In addition to using this ratio for management, investors look at these numbers as well in order to assess your company’s operations. For example your balance sheet shows your assets such as cash and inventory but the sales turnover shows how productive your organization is in terms of selling and turning this inventory and converting it to cash.
This is one of the most effective ways to improve your business. The higher the sales turns the more productive you are and more profitable you are. Because of this it is crucial for you not only to measure and track your sales turnover but also compare your numbers with other companies.
Keep in mind that you should benchmark against companies in your industry or similar organizations because this number varies significantly across industries and markets. An example of industry with a very high sales turnover is the retail industry where some of the inventory is sold daily. On the other hand manufacturing businesses will have a lower turnover values on average. It is very important to define the organizations which you’ll use for benchmarking.
This sales and productivity KPI can be improved by using various management techniques and approaches such as better business model, better supply chain management, measuring and improving your inventory metrics, better relationships with your vendors and suppliers and better trained and educated sales force who understands the importance of management and productivity in addition to selling your products. Because of the importance of sales turnover on your business it is crucial to include this KPI in your top monitored metrics in your regular business reporting system.
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