Question

As a manager, how could you determine if your firm is holding too much inventory?

Answer 1

We can find inventory movement using two key ratios

i) inventory turnover ratio= cost of goods sold/inventories

If Inventory turnover ratio is low that means company is unable to sell the inventory quickely and holding too much inventory. If comapny unable to sell the inventory quickly it leads to inventory losses.

ii) Inventory holding period=(Inventories/cost of goods sold)*365 (365 days in a year)

If Inventory holding period is high, it means that the company is holding too much inventory.