For a business to grow, it's important to know how to manage its resources intelligently and efficiently. This includes everything from your team and finances to inventory management. Therefore, it's crucial to monitor some indicators and understand how to use them in your planning. One of the best examples of this is calculating average inventory.
Even though it's a relatively simple indicator to calculate, it provides a series of insights for managing your inventory—especially when you monitor its changes over the long term and compare it with other performance indicators in your business.
To help you better understand the topic, we'll explain what average inventory is, the importance of calculating this indicator, and how to do it. Stay tuned!
As the name suggests, it's the average number of products available in stock over a defined period. This is a simple indicator, but it reflects several aspects of your business, including the quality of your inventory. inventory management, the number of sales, among other factors.
The timeframe for calculating this average may vary depending on your business, preferences, and strategies. For example, you can calculate the average daily, weekly, monthly, or even yearly, depending on how often you renew your products and close sales. However, regardless of this interval, it's important to perform the calculation regularly.
As we mentioned, regardless of the size of your company, it's essential to monitor your inventory management performance indicators. After all, even if some of these metrics don't seem immediately relevant, they provide a wealth of useful information and insights into your work.
Here are some of the main reasons to always calculate your average inventory.
One of the keys to optimizing the number of units of a product in stock is understanding the product's turnover, which is the frequency with which the item is sold to the public. The higher the demand for a product or the shorter its shelf life, the faster it enters and leaves your inventory.
For goods with high durability or sold in large batches, such as steel and other raw materials, this interval tends to be longer. For perishable products, such as food, the time is usually much shorter.
Just like product volume, you also need to consider how long it will take to replenish your merchandise. This involves not only your delivery times, suppliers, as well as the quantity purchased per batch and the frequency of sales. Some goods, for example, need to be replenished quickly and cannot spend a long time in a warehouse.
To make a efficient inventory management, the most important thing is to have good planning and a well-defined strategy. If you already know how your products should be distributed, stored, and delivered to the end customer, you considerably reduce your chances of error.
By calculating average inventory, you have an important statistic to help you define the best strategy for your product, or even determine whether you need to use different methodologies for each product available in the company.
You'll rarely get 100% of product utilization from your inventory. Even the most efficient management must consider that some merchandise will be lost along the way, instead of being sold.
But that doesn't mean you shouldn't dedicate time and energy to cutting down on waste. On the contrary, by tracking your average inventory, you can identify whether the value is significantly higher than expected and whether there was a large volume of acquisitions relative to the actual amount. sales.
Excess merchandise is a problem, as is shortage. Stockouts, or point-of-sale outages, occur when there aren't enough products to meet demand, resulting in a reduction in revenue. Good inventory management is also essential to prevent this from happening.
As we said, calculating average inventory is not difficult and can help with strategies to make your company more profitable. competitive. Just understand how it works and what values you are tracking.
First, you need to define a time interval for measuring your inventory and a time unit for that measurement. For example, you could calculate your daily inventory average over a month.
Next, you should measure your beginning inventory, which is the inventory volume on the first day of the chosen interval, as well as your ending inventory, which is the last inventory measured during that same period. With these values in hand, you can use the following formula to calculate your average inventory:
Average Stock = (Beginning Stock + Ending Stock) / Chosen Time Period
To better clarify the matter, let's use an example. Let's say you want to measure your company's average monthly inventory over the course of a year. To do this, you measure your initial inventory on the first business day of the year, which is 200 units. Then, you continue tracking the values until you measure your inventory at the end of the year, which is 400.
Inserting the values into the formula, we have the following calculation and result:
Average Stock = (Beginning Stock + Ending Stock) / Number of Months
Average Stock = (200 + 400) / 12 = 600 / 12
Average Stock = 50 units per month
In other words, over the course of a year, your company had, on average, 50 units of the product in stock per month.
Calculating average inventory is a simple but very useful indicator for evaluating your management performance, especially when it is related to other data, such as sales and billing. Therefore, you should monitor this index regularly and always use it in your strategies, especially to analyze your business in the long term.
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