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Learning more about inventory ratio
Your company's inventory needs to generate a steady cash flow. You don't want to order too many products as they can sit on the shelves for a long time and lead you to struggle to sell the products. What is your inventory turnover and is it providing you with a steady cash flow? How do you calculate your inventory turnover? You will start with dividing the cost of goods that you currently have and how many products are sold during this time. This will help you to see if you were able to clear out your inventory in a certain time frame and if you needed to replace them. If you didn't, there is a good chance that you are ordering too much inventory and that it's sitting on the shelves for a very long time frame. Setting goals for your companies sales and cash flow will allow you to have more control over your inventory and to see that you are meeting your companies obligations. You need to not only look at how much your inventory is costing you and how much you are selling it for you also need to keep in mind that you will have interest costs along with repayment schedules with your vendors and others. Remember you also have long term debt concerns to also deal with. How does your business deal with investors? Are they getting a healthy return on their investment? How about the capital your company has? How do you bring about more capital for your business? Do you sell off stocks and bonds and are you declaring what the dividend amounts average? What about when dividends aren't declared? You must always be sure that you are paying your interest and repaying the principal amount to the investors. Raising capital isn't always the easiest thing for companies to do and bonds can be a risky way to raise capital for your business if you are making obligations that you really cannot afford to meet properly. Using stock is nice as it does fluctuate and you aren't held to interest and principal in the same manner. The thing that makes bonds so effective is the fact that investors will loan a great deal of money as they know they will be able to get a nice interest rate and healthy return. How does this all impact your company's inventory? When you are paying out high interest rates and returns to your customers you aren't as likely to have as much money to invest into your inventory and bring about the right type of return you need for the company. You have to find the balance your company needs with inventory as this too isn't very easy to do. Get help by turning to programs like QuickBooks as it will perform an inventory ratio for you and it will help you to see how the inventory costs are fluctuating and where they need to be changed in order to generate a decent income and proper return rate for your investment and for your investors as well. Never order if you cannot afford the payments to your vendors or consider smaller order to stay in business. |
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