There are several metrics to evaluate inventory accounting—inventory aging, inventory turnover, gross margin by item, inventory carrying cost, etc. Which ones will give you the most critical results? In this article at NetSuite, find out the 3 crucial ways you can evaluate inventory accounting.
Measuring Inventory Accounting
To find the crucial metrics for business inventory accounting in a major way, know what matters to you the most. Following are the 3 metrics with which measuring the value of inventory accounting becomes easier:
- Inventory Turnover: This measures the frequency at which you sell products and how soon you replace them in a year. If customers are buying more, you will have a high turnover. Stop ordering if you have a low inventory turn. Average days to sell tells you the length of time it takes to sell products. Also, it calculates how long you will be able to sell before ordering in a fresh batch. While a low average day to sell can cause you out-of-stock problems, the opposite can lead to warehouse overload.
- Carrying Cost: Holding an item in your inventory has a cost and that is the carrying or holding cost. This includes the rent, product maintenance, utility charges, expiry costs, and opportunity costs. Accumulate the costs incurred per year to find out the percentage your inventory is costing that year alone. A few companies categorize the carrying cost under the percentage of revenue. The 2010 Supply Chain Consortium tagged the carrying cost as revenue percentage as25% for manufacturers, 1.8% for retailers, and 0.5% for the top rest.
- Inventory Aging: This is a simple metric that you can measure by dividing the inventory cost by the sold goods cost and then multiply the result by 365 for a year. The older the inventory you hold, the costlier it becomes. The cost varies on the sector you are utilizing the metric for. With upgraded technology coming up every day, it will cost you big if you stay put with your obsolete systems. For retail, you must sell it in discounted price or with other products.
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