What is meant by the term "inventory turnover"?

The term "inventory turnover" refers to a measure of how often inventory is sold and replaced within a given period. This metric is crucial for businesses as it provides insight into how efficiently a company is managing its inventory. A high inventory turnover indicates that a company is selling goods quickly and maintaining less stock, which can lead to reduced holding costs and improved cash flow. Conversely, a low turnover rate may suggest overstocking, weak sales, or outdated inventory, which can tie up capital and increase costs associated with storage and obsolescence.

Understanding this concept is vital as it allows businesses to assess their sales strategies and inventory management practices. Companies often aim for an optimal turnover rate that reflects their industry standards and operational needs, helping to balance supply with customer demand effectively.