LOW turnover ratio - Advice needed

Lindi

Hi,

I have done some ratios on our sales, purchases and inventory recently, and was wondering if anyone could confirm the norm for these types of ratios, as I am not in contact with any accountants at work, but they seem rather high. My analysis ran over 7 months and purchase/sales ratio averages around 51%; inventory turnover ratio is less than one all the time, and if I did the turnover days correctly then it looks like we are treating our inventory as part of the furniture at an average days of 822. Can someone advise if I am doing these calculations right and what does this mean for profits?

Any advice appreciated.

MarieNoelle

Hi @Lindi

Not sure I can help but it may be useful to tell us what industry you are in?

Lindi

@MarieNoelle we are in the manufacturing industry, all of our inventory is raw materials. We only process finished goods on the system when a product is complete and ready for despatch and don't hold stock of FG so these should not contribute to the inventory. That makes it tricky as it is not a case of stock not flying off the shelf quick enough, but I suspect some bulk stock holding is going on and I suspect there is a misconception that buying in bulk is cheaper when we are not using the stock quite as quick as we should.

Neillaw

Do you not have a set of BOM's to agree back too,

Lindi

Yes we work to BOM's but don't hold stock of finished goods, we are a made to order manufacturer. I think I have ascertained that due to the nature of our industry we are generally guilty of stock holding of raw materials, I am not sure how to improve this but will have a go. But does it make sense to assume that if sales are down and purchases are down, stock being constant or increased can affect profits in a negative way?

Neillaw

I take it from your comments that you are a bespoke manufacturer.

As you hold no finished goods stock it would lead me to believe that you invoice straight away this would mean that your purchases should only be the items that have been consumed against the order, a stock increase won't affect your profitability unless you have a timing issue with the invoice and stock holding as you will have a debit for the invoice and a credit for the increase in stock. (Are you using an MRP system)

I would be looking or trying to move over to a more JIT stock basis, I would look at my stock holdings v lead times to establish a stock level. However if your bespoke with short lead times then you should be able to reduce stock with proper production planning. Proper planning would allow you to bring in stock when required on short lead times.

Stock holding will affect profitability when it's written off or the value is written down, 822 days seems to be a long stock holding. What are the profitability levels on your BOM's.