Inventory Turnover Ratio: What It Is, How It Works, and Formula

Inventory financing is a type of term loan or business line of credit that helps business owners pay for the cost of buying inventory for their stores. This allows companies to purchase the amount of stock they need—even if they don’t have sufficient capital available. Depending on the loan terms and the collateral, borrowers may use funds to buy finished products, raw materials or other supplies necessary for operations.

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• The inventory turnover rate measures how many times a company has sold its average stock in a specific period.

Investors can find data on inventory in public filings of a company on its investor relations website or through the Securities and Exchange Commission (SEC) website. The business owner who seeks inventory financing may not be able to obtain the full upfront cost of the inventory. As such, any potential hiccup is factored into setting an interest rate on an asset-backed loan. Proper inventory management depends on the type of business and what type of product it sells. There may not be one perfect type of inventory management, because there are pros and cons to each. But taking advantage of the most fitting type of inventory management style can go a long way.

Inventory Obsolescence

Add in the interest rate and fees to determine the annual percentage rate (APR). The APR reveals the total cost on a yearly basis of a loan or line of credit. Compare prices from different lenders and read the fine print before signing off on financing, so you know what you’re agreeing to. Every lender and financing company has different guidelines for inventory loans. Most lenders require you to have at least a year of operations under your belt, although it is possible to find lenders who only need six months.

Financial assets are non-physical resources that are quickly convertible into cash. Monetary assets include securities and other investment instruments, such as bonds, stocks and options. The four types of inventory management are just-in-time management (JIT), materials requirement planning (MRP), economic order quantity (EOQ) , and days sales of inventory (DSI).

Retail Inventory Management

As of December 2021, BlueVine no longer offers invoice factoring as one of its financing methods. If a company frequently switches its method of inventory accounting without reasonable justification, its management is likely trying to paint a brighter picture of its business than what is true. The SEC requires public companies to disclose LIFO reserve that can make inventories under LIFO costing comparable to FIFO costing.

Having insight into your stock at any given moment is critical to success. Decision makers know they need the right tools in place to be able to manage their inventory effectively. the advantages of amortized cost NetSuite offers a suite of native tools for tracking inventory in multiple locations, determining reorder points and managing safety stock and cycle counts.

What Can Inventory Tell You About a Business?

If you’re considering crowdfunding to raise inventory financing, review the platform’s guidelines carefully. Some require you to fund campaigns before you can fully access the money, and the majority charge a fee for raising funds. At this point, you may be given an initial quote for loan terms and asked to pay a due diligence fee.

Your lender has the right to inspect the inventory to make sure it has retained its value. Let’s say a car dealer wants to increase inventory, buying more cars because of an expected increase in new car sales. The dealer must purchase the inventory from the car manufacturer, and vehicles are expensive. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.

Inventory Management Methods

These loans and lines of credit can also help business owners manage cash flow more efficiently and provide flexibility—especially for seasonal businesses. As an accounting term, inventory is a current asset and refers to all stock in the various production stages. By keeping stock, both retailers and manufacturers can continue to sell or build items.

Equipment financing customers who repay the total remaining balance early, at any point during the term, will automatically receive a 6% discount off the total remaining balance. In accounting, inventory is considered a current asset because a company typically plans to sell the finished products within a year. Multichannel order fulfillment operations typically have inventory spread across many places throughout the supply chain. Inventory visibility is knowing what inventory you have and where it’s located. Businesses need an accurate view of inventory to guarantee fulfillment of customer orders, reduce shipment turnaround times, and minimize stockouts, oversells and markdowns. For example, a ski manufacturer using an MRP inventory system might ensure that materials such as plastic, fiberglass, wood, and aluminum are in stock based on forecasted orders.

Customer Service Level (CSL)

This leads to a lower COGS, higher profit, and potentially higher taxes, particularly during periods of inflation. For example, let’s say your credit limit is $200,000, and you spend $50,000 on a bulk inventory order. You would still have access to the remaining $150,000 on your line of credit. However, once you pay back the $50,000 you used (plus interest), your credit limit would return to $200,000. While your inventory is waiting to be sold, you will need to keep track of it and make sure it is in good repair and in shape.