Inventory as Percentage of Sales Revenues

June 3, 2011

Q: Our sales have dropped off pretty dramatically over the last two years but our inventory level hasn’t. What is a common level of inventory for NSCA contractors?

A: I find it best to track inventory as a percentage of sales revenues, and you are certainly not alone in expressing a concern about this. It’s a fairly easy thing to overlook as the number itself may not jump out because the dollar amount seems pretty normal. But, if your sales have declined as a percentage of total revenues, the number has risen dramatically. Likewise, when the balance sheet is looking a little rough, no one likes to face the reality of the actual (depreciated) value of that inventory.

The average/mid-sized company in our membership carries an inventory that is 4% of its total revenue ($378k inventory to $9.3 MM in sales) and has a turnover rate of 14.98 (cost of materials sold divided by the inventory). What has been happening to many of your fellow members is they see the $378k number, but don’t watch the ratios. I suggest you be proactive in managing this as you don’t want operating capital tied up in excess inventory. –CW

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