• COVID-19
  • Insights
  • Who We Help
    •   Industrial Automation
    •   Manufacturing & Distribution
    •   A&E Professional Services
    •   International Businesses
      • ◦   Expanding Outside the U.S.
      • ◦   Expanding to the U.S.
  • Services
    •   COVID-19
      • ◦   Cash Flow Confidence Assessment
      • ◦   Maximize Your Loan Forgiveness
      • ◦   5 Key Focus Areas
      • ◦   COVID-19 Resource Center
    •   Client Accounting
      • ◦   Software Solutions
      • ◦   Accounting Support
      • ◦   Reporting
    •   Tax
      • ◦   R&D Tax Credit
      • ◦   Tax Credits & Incentives
      • ◦   Tax Structure
      • ◦   Federal Tax
      • ◦   State & Local Tax
      • ◦   Personal Tax
      • ◦   Other Tax Filings
    •   Advisory & Assurance
      • ◦   Assurance Levels
      • ◦   Reporting
      • ◦   Employee Benefit Plan Audits
      • ◦   Technical Accounting & Reporting
    •   Consulting
      • ◦   Data Analytics
      • ◦   Transaction Services
      • ◦   Business Planning
      • ◦   Succession & Exit Strategies
    •   International
      • ◦   International Tax
      • ◦   Foreign Direct Investment
      • ◦   Global Expansion
      • ◦   International Accounting
  • Events
  • Careers
    •   Why C&M
    •   Students
      • ◦   Campus Events
      • ◦   Internships
      • ◦   Reach Beyond Program
    •   Experienced Professionals
      • ◦   Team member profile videos
    •   Opportunities
    •   Employee Journals
    •   Office Tour
  • About Us
    •   How We Help
      • ◦   Service Approach
      • ◦   Affiliations
      • ◦   Communications & Technology
    •   Meet Our Team
    •   Testimonials
    •   Our Videos
    •   Our Story
  • Contact Us
  • Subscribe
CHANGE COUNTRY:
  • United States
  • 中国
  • Client Login
Clayton & McKervey Logo
  • COVID-19
  • Insights
  • Who We Help
  • Services
  • Events
  • Careers
  • About Us
  • Contact Us
  • Subscribe
    • Most Recent Insights
  1. Home
  2. Insights
  3. Turns on Inventory – Systems and Processes to Monitor Inventory Levels

Turns on Inventory – Systems and Processes to Monitor Inventory Levels

Posted by Dave Van Damme and Jim Biehl on June 22, 2020

Dave Van Damme Dave Van Damme

You’re in the wholesale or distribution space and have a huge asset, called inventory, which needs to be converted to cash, but you aren’t great at tracking or counting it and you are not really sure which items are sitting.  So what do you do?   Outlined below are some simple ratios that can give you additional insight into what is happening with your inventory and allow you to start moving in the right direction.

Turnover

One of the most common ratios that we look at in servicing wholesale and distribution companies is inventory efficiency, or more specifically turnover and days on hand.  These ratios provide valuable insight into how successful a business is at managing one of their most significant assets.

In the broadest sense, turnover identifies how many times per year an average inventory clears out of a distribution center and is replenished.  That figure is compared against the number of days in a year, and speaks to how many days on hand of inventory you have;  meaning if you weren’t going to place another order, how many days it would likely take to sell out of everything.

Generally, the higher the turnover the better, as it would indicate that inventory is efficient and that owners are buying (and then selling) what the market is demanding.  A lower than desirable turnover indicates lower sales in relation to carrying higher inventory, which further means cash is tied up in inventory.  In some cases, cash is being spent on higher interest costs associated with money borrowed to purchase inventory that isn’t turning over.

Categorization

While computing inventory turnover and days sales outstanding are a great starting place, you then need to take your ratio analysis to the next level by categorizing inventory into “meaningful groups,” and then recomputing those same ratios for next-level insight.

Selection of meaningful groups depends on the particular business. For example, a soda-pop distributor might utilize generic categories such as cans versus bottles. Taking things one step further could also group caffeinated beverages vs. noncaffeinated; and even further within with diet caffeinated colas, vs. regular caffeinated colas.

Market Insight

Categorization matters because with this critical step, management can begin to have better insight into what’s actually happening with inventory.  From that data, a number of insights and related action steps can be implemented, including increasing demand through targeted marketing, analyzing and possibly consolidating vendors to achieve pricing/quantity discounts or even optimizing reorder points.

Turnover data should be compared to industry peers to both ask questions and, separately, understand your company’s performance.  Through this objective comparison, it may become clear what can be optimized.

Understanding and regularly reviewing ratios is the opposite of inventory opacity. Simply put, you’ll be able to influence how resources are performing so that you can more quickly adapt and respond to changes in the marketplace.  It also frees up cash to be invested in more than just inventory!

Financial analysis of inventory can be challenging, and it may not be clear where to start or what to focus on first.  Clayton & McKervey can help provide resources and interpret results.   Contact us today to learn more.

Our team is always ready to help.

Please contact us for more information.

Dave Van Damme

Dave Van Damme

Senior Manager, Advisory & Assurance

Contact Dave   |   Read Dave's bio

related news

How to Calculate R&D Tax Credits

As we’ve seen in the first two installments of this series, business owners often miss out on the R&D tax credit opportunity and the bottom-line infusion it can provide. Many…

Read full story

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

Read full story

Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
  • China Consulting
  • Clayton & McKervey
  • Client Accounting Services
  • Consulting
  • COVID-19
  • Data Analytics
  • Estate Planning
  • Expanding Outside the U.S.
  • Expanding to the U.S.
  • From the President
  • Industrial Automation
  • International
  • Manufacturing & Distribution
  • Mexico Consulting
  • Podcasts
  • Private Client Services
  • Tax & Tax Credits
  • Transaction Services
  • Videos

Authors

Read news direct from our managers and stakeholders.

    • Ben Smith
    • Beth Butchart
    • Bryan Powrozek
    • Carlos Calderon
    • Casey Haggerty
    • Clayton & McKervey
    • Dave Van Damme
    • Denise Asker
    • Eric Lin
    • Jim Biehl
    • Julie Killian
    • Kevin Johns
    • Margaret Amsden
    • Miroslav Georgiev
    • Nina Wang
    • Rob Dutkiewicz
    • Ruben Ramirez
    • Sarah Russell
    • Sue Tuson
    • Tarah Ablett
    • Teresa Gordon
    • Tim Finerty
    • Tim Hilligoss
    • Wendy Reedy

Additional Resources

Additional news from Clayton & McKervey can be found below.

  • Subscribe to our email newsletter
  • View upcoming events
  • Contact us to let us know how we can help you
  • Main Content
  • Related Insights

Turns on Inventory – Systems and Processes to Monitor Inventory Levels

Posted by Dave Van Damme on June 22, 2020

Dave Van Damme

You’re in the wholesale or distribution space and have a huge asset, called inventory, which needs to be converted to cash, but you aren’t great at tracking or counting it and you are not really sure which items are sitting.  So what do you do?   Outlined below are some simple ratios that can give you additional insight into what is happening with your inventory and allow you to start moving in the right direction.

Turnover

One of the most common ratios that we look at in servicing wholesale and distribution companies is inventory efficiency, or more specifically turnover and days on hand.  These ratios provide valuable insight into how successful a business is at managing one of their most significant assets.

In the broadest sense, turnover identifies how many times per year an average inventory clears out of a distribution center and is replenished.  That figure is compared against the number of days in a year, and speaks to how many days on hand of inventory you have;  meaning if you weren’t going to place another order, how many days it would likely take to sell out of everything.

Generally, the higher the turnover the better, as it would indicate that inventory is efficient and that owners are buying (and then selling) what the market is demanding.  A lower than desirable turnover indicates lower sales in relation to carrying higher inventory, which further means cash is tied up in inventory.  In some cases, cash is being spent on higher interest costs associated with money borrowed to purchase inventory that isn’t turning over.

Categorization

While computing inventory turnover and days sales outstanding are a great starting place, you then need to take your ratio analysis to the next level by categorizing inventory into “meaningful groups,” and then recomputing those same ratios for next-level insight.

Selection of meaningful groups depends on the particular business. For example, a soda-pop distributor might utilize generic categories such as cans versus bottles. Taking things one step further could also group caffeinated beverages vs. noncaffeinated; and even further within with diet caffeinated colas, vs. regular caffeinated colas.

Market Insight

Categorization matters because with this critical step, management can begin to have better insight into what’s actually happening with inventory.  From that data, a number of insights and related action steps can be implemented, including increasing demand through targeted marketing, analyzing and possibly consolidating vendors to achieve pricing/quantity discounts or even optimizing reorder points.

Turnover data should be compared to industry peers to both ask questions and, separately, understand your company’s performance.  Through this objective comparison, it may become clear what can be optimized.

Understanding and regularly reviewing ratios is the opposite of inventory opacity. Simply put, you’ll be able to influence how resources are performing so that you can more quickly adapt and respond to changes in the marketplace.  It also frees up cash to be invested in more than just inventory!

Financial analysis of inventory can be challenging, and it may not be clear where to start or what to focus on first.  Clayton & McKervey can help provide resources and interpret results.   Contact us today to learn more.

Our team is always ready to help.

Please contact us for more information.

Dave Van Damme

Senior Manager, Advisory & Assurance

Contact Dave   |   Read Dave's bio

related news

How to Calculate R&D Tax Credits

As we’ve seen in the first two installments of this series, business owners often miss out on the R&D tax credit opportunity and the bottom-line infusion it can provide. Many…

Read full story

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

Read full story

Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
  • China Consulting
  • Clayton & McKervey
  • Client Accounting Services
  • Consulting
  • COVID-19
  • Data Analytics
  • Estate Planning
  • Expanding Outside the U.S.
  • Expanding to the U.S.
  • From the President
  • Industrial Automation
  • International
  • Manufacturing & Distribution
  • Mexico Consulting
  • Podcasts
  • Private Client Services
  • Tax & Tax Credits
  • Transaction Services
  • Videos

Authors

Read news direct from our managers and stakeholders.

  • Ben Smith
  • Beth Butchart
  • Bryan Powrozek
  • Carlos Calderon
  • Casey Haggerty
  • Clayton & McKervey
  • Dave Van Damme
  • Denise Asker
  • Eric Lin
  • Jim Biehl
  • Julie Killian
  • Kevin Johns
  • Margaret Amsden
  • Miroslav Georgiev
  • Nina Wang
  • Rob Dutkiewicz
  • Ruben Ramirez
  • Sarah Russell
  • Sue Tuson
  • Tarah Ablett
  • Teresa Gordon
  • Tim Finerty
  • Tim Hilligoss
  • Wendy Reedy

Additional Resources

Additional news from Clayton & McKervey can be found below.

  • Subscribe to our email newsletter
  • View upcoming events
  • Contact us to let us know how we can help you

Website

  • COVID-19
  • Insights
  • Who We Help
  • Services
  • Events
  • Careers
  • About Us
  • Contact Us
  • Subscribe

Location

+1 248.208.8860
2000 Town Center
Suite 1800
Southfield, MI
48075 | USA

Connect

  • Events
  • Newsletter
  • Client Login

Social

  • LinkedIn
  • Facebook
  • Twitter
  • Glassdoor
  • YouTube
  • Instagram

Awards

DFP Top Work Places Best & Brightest
Prime Global

Tax | Accounting | Assurance | Consulting | Highly technical and accessible team of CPAs helping growth driven, closely held, middle market companies compete in the global marketplace. Michigan-based accountants and advisors focused on helping business owners in the United States and throughout Europe and China.

Privacy Policy Disclaimer

© 2021 Clayton & McKervey