Average Inventory

Finance allah shmoop What is inventory turnover All right well

this is inventory and this is a turnover Okay so

what is it really Well you have inventory I'ii stuff

you want to sell and then you sell it You

started the year with a thousand edible necklaces The pumpkin

spice model promises to be very popular anyway You sold

them for ten dollars each So you have ten grand

in inventory But you did five hundred eighty thousand units

of sales inventory turnover Big Really big five hundred eighty

times big Okay different story Your tesla You have one

hundred tires in inventory You had that same number january

one in april twelfth In july twenty third and december

Thirty one of this year One hundred tires steady state

But you sold fifteen thousand cars in a year We'll

let four tires apiece Yeah That's a sixty thousand tires

And we're not counting that thing in the trunk It's

Not really a tyre anyway It's More like a bicycle

tire Enormous inventory turnover Sixty thousand over one hundred or

six hundred Ex enormous inventory turnover Very efficient use with

the capital spent on those hundred tires Well so why

Does inventory turnover even matter Alright Yeah it's about capital

We hinted you there Think about your capital needs Like

if you have to raise tons of money to store

tons of inventory that you take forever to sell Well

then you're not using your capital very efficiently Like why

not make the tire manufacturers who are actually in the

business of building distributing and planning for tyre demand Why

not make them hold all the inventory using their capital

not yours Well not all inventory turnover numbers mean the

same thing like what's inventory in an oil rig leasing

company Well you keep eight rigs on hand you know

you'll have to tow them out to the middle of

the ocean At some point they're crazy expensive to build

and maintain and some years when oil is really cheap

there just won't be any demand for your rigs for

drilling so you'll have to store him and oil them

and wave to them kindly So how do you make

sense out of that number like oil rig Turn over

when you're comparing it to say a grocery stores turnover

where the average six pack of diet coke last like

fifty three hours on the shelves made so inventory turnover

is really more of a quote relative to last year

unquote thing or a quote relative to our hated competitors

bob unquote kind of thing And there are ways to

game this data point as well the easiest of which

is well too Just let your inventory amount fall like

if you started the year with a thousand naked cupid

hood ornaments and let supplies dwindled to just two hundred

while then via industry norms of just taking the average

quarterly inventory levels through the year Well you might show

an average inventory of six hundred units this year thereabouts

and you'd be going into the next year with only

two hundred and generated a lot of cash along the

way Like you turned all that money that was tied

up in your inventory in the cash on your bottom

lines that good Is it bad Well just like pretty

much everything in from of finance videos and diapers it

depends Well it's good to have low inventory to a

point What happens if you run so low that customers

can't buy from you because you can't fill orders for

three months and then they go to bob than the

cost of not having enough inventory was massive You lost

sales profits and market share or power or theft and

it hurt your brand like people don't respect it as

much anymore Yeah sorry just keeping it real But in

general high turnover is good It means you're using your

inventory capital of the capital you spent to build your

inventory efficiently and that when you make it to the

top of the hill you're you know able to keep 00:03:43.925 --> [endTime] your balance Yeah