The best measure of inventory utilization is the inventory turnover ratio (aka inventory utilization ratio), which is the total annual sales or the cost of goods sold divided by the cost of inventory. A higher inventory turnover ratio indicates more effective cash management and reduces the incidence of inventory obsolescence. Generally, the average collection period should not exceed the credit terms that the company extends to its customers.įor a company to be profitable, it must be able to manage its inventory, because it is money invested that does not earn a return until the product is sold.
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