Stock turnover rate is the name given to the parameter that shows how many times the products in stock have been sold and replenished. This parameter has been created to give an idea about the overall efficiency of the company.

Generally, it is expected that the stock turnover rate is higher than the industry average. However, merely having a higher stock turnover rate is not sufficient to say that sales are good.

When the stock turnover rate is calculated to be high, it is understood that there is a high demand for products and that storage costs are not unnecessary. It also indicates that products are being sold with an effective sales policy and are being updated quickly.

What is Stock?

Stock refers to the finished goods, raw materials, and semi-finished goods that a company keeps on hand to meet potential immediate needs and to ensure production is maintained without interruption. A manufacturing firm not only keeps the goods that it produces and are ready for sale in stock, but also all the materials necessary for production and distribution, such as various materials, raw materials, tools, etc. Holding stock is known to be an expensive form of investment. This is because the company essentially ties up its cash budget in these stocks. Sometimes stockpiles can occur due to unforeseen declines in sales. In this case, production is slowed down or new purchases are halted until the excessive buildup in inventories is stopped. To minimize the cost of holding stock, companies try to determine the minimum stock level they need to maintain using advanced business techniques. Difficulties in sourcing raw materials and uncertainties in the market can force businesses to hold stock in larger than normal volumes.

Why is Stock Tracking Important?

Stock tracking is a system needed during the times when products are produced or sold in a business. Any business that produces products must ensure that there are sufficient amounts of raw materials required for production. Otherwise, it will not be possible to produce the required amount of products. Firms that manage stock management correctly can carry out the necessary processes in a timely manner to ensure the required products are available.

As is known, stockholding applies only to products, and since services cannot be stocked, service production is not subject to stock records. When stock management of products in businesses is not carried out without error, it is possible for businesses that produce or sell products to experience revenue losses. Therefore, it is important to track stock accurately. Nowadays, software that enables stock management provides significant convenience to businesses.

What is Stock Turnover Rate? What Should it Be?

Since this rate varies for every company and every sector, it is not possible to determine just one outcome at this point. The nature of the work, the products sold, and the market in which they operate will cause changes in the stock turnover rate, which is why companies should find the ideal rate for themselves.

To give an example, stock turnover must be high for perishable food products or quickly spoiling products. Otherwise, the products in stock may spoil. This can be detrimental to the company. Conversely, for products with a longer shelf life (e.g., electronics), the stock turnover rate may be lower than it should be. This ratio can also vary based on the products the company is selling.

When the stock turnover rate is high, it is considered that the products in stock are sold quickly and that the product turnover is being maintained. A higher rate indicates successful sales for the company. However, a high turnover rate doesn't always yield positive outcomes. Firms that renew stock too quickly may be operating with insufficient stock or may be experiencing regular stock shortages. This ratio can lead to the emergence of two different situations.

When the stock turnover rate is lower, it is understood that the company cannot convert the products in stock into sales quickly. In this case, it is thought that the company management has insufficient advertising and marketing efforts, and that it faces some strategic problems. Additionally, companies may be holding more products in stock than necessary for speculative purposes, or may be holding excess inventory for long-term sales.

How is Stock Turnover Rate Calculated?

Stock turnover rate is generally calculated by dividing the cost of goods sold (COGS) over a specific time period by the average stock level during that period. In this way, it can be estimated how much of the existing stock can turn over according to forecasts for the upcoming period. Companies calculate the turnover rate of stock based on sales data from past periods.

How is High Stock Turnover Rate Interpreted?

As you might expect, having a stock turnover rate higher than normal is a desirable situation for every business. Because high stock turnover rates can indicate that your business is successfully making sales. If you have a high stock turnover rate, the following can be said about your business;
● Businesses with a high stock turnover rate have a good and successful stock control policy.
● It reveals that the cooperation your business has with suppliers is successful. It is clear that your business has not faced issues when sourcing products, thanks to your stock turnover rate.
● A high stock turnover rate indicates that your stock is updated in a timely manner.
● Your company has become more successful in selling related products.

How is Low Stock Turnover Rate Interpreted?

A low stock turnover rate is an unexpected situation. Because low stock turnover rates indicate that there are certain problems within your businesses.
● If the stock turnover rate is low, one of the first things to say is that your company has not adjusted its supply process according to sales.
● It may indicate that you have problems with your suppliers. As your business may face issues when sourcing products, there may be some declines in stock turnover rate.
● A low rate shows that you have over-purchased due to price increases, leading to an increase in your product inventory.
● This low rate indicates an imbalance among your stock groups.
● A low turnover also brings with it the desire to show high stock levels at the end of the period.
If your stock turnover rate is low, you need to take many actions to increase it. Because low stock turnover rates can cause problems for your business in terms of profitability. Additionally, low stock turnover rates also indicate that marketing activities are not effective in businesses. If you have products with a short shelf life and there are delays in the expiration dates, you should consider that your business will incur losses, and you should determine your stock turnover rate accordingly.

What Should the Stock Turnover Rate Be?

The question of what the stock turnover rate should be is a common question for many companies. It is not possible to say that there is any ideal number of days concerning the stock turnover rate. Because stock turnover rates generally show some variations depending on the sector that encompasses them.

For example; while the stock turnover rate for a company selling food products can be quite high, that of a company selling luxury products might be quite low.