Sample Essay

The inventory turnover refers the cost of goods sold divided by the average inventory within a financial year. The average inventory a summation of the opening inventory and closing inventory divided by two. The already existing business uses this ratio to evaluate the pace at which their merchandize is being sold on the market. For a firm thriving in a market, this ratio should be one or greater than one.The existing firms can use the already available data to evaluate whether their performance are improving or not. This ratio is very important, however, a new firm cannot be able to use this ratio since it does not have an existing data, and this means that it cannot use this data to forecast or evaluate its performance. A firm needs to understand the inventory since a high inventory does not mean that a firm is doing well and neither does a low inventory turnover mean that a firm is not performing (Gorman, 2003). A low inventory turnover may be due to the future expectation resulting to big volume in stores. A low inventory turnover may also be catalyzed by high volume of inventory. Of importance is to not that the new firm does not have any data from previous financial years hence making the competitors to be at a competitive advantage.

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