or immeasurable ones like pissing off a customer who has to wait an extra week for the widget and might switch to widget maker B. The working capital turnover is calculated by taking a. When you look at it that way you realize most businesses are just one customer away from going into negative turnover typically and this has 'costs' on the business, either specific - the added costs of working overtime to produce the widget, of hiring more workers, etc. A companys working capital turnover ratio can be negative when a companys current liabilities exceed its current assets. The mentality in the past decade or two (largely stemming from the automotive industry) is the it's better to match widgets produced to widgets sold 1 for 1, making extra only means extra labor hours paid, costs to store widgets, extra materials purchased with no benefits. Due to such underestimation company buys a lower. Let's settle for a broad summary.Ī company that sells widgets does a complex analysis to calculate the cost to make a widget and this analysis includes tons of assumptions likeġ- how many person-hours to make the widgetĢ- how many people work on the assembly lineģ - how much does it cost to hire more workers or work overtimeĥ - how many widgets they'll sell per monthĦ- cost to store widgets made but not sold that month The inventory turnover of a company may be too high when it underestimates the demand for its goods. This is kind of a big topic, supply chain is an entire career and world of knowledge but itself, so there isn't an easy answer here. Total Landed Cost is the entirety of the cost to put a product into the customer's hands and it differs from other costs because it factors in things like shipping, taxes, customs dues, and other fees that aren't part of the "production" of the thing your selling. Having too little, too much, or just enough of something are all problematic and advantageous for different reasons. It's not good if I get 5 apples and sell 10 by closing (that's your negative turnover case) because how do I sell an apple I don't have? I might have just annoyed a customer who will never come back, or I need to rush out to a different store, but an apple at their cost (greater than my cost from the orchard) and maybe I'm losing money on that deal.Įnd of the day, supply chain is hard. Not only to have I have to store 90 apples, I have to move them around, I have to restock my shelf, and some might go bad. It's not good if I get 100 apples, can only put 10 out, then sell 10 by closing. Maybe I should order extra apples and store them. But what if my delivery is late? I have no spare apples so I can't sell apples today. This is generally not good for a company, but it gets very complicated quickly.īest case is I get 10 apples morning, put them out, and sell 10 apples by closing. It's a weird of writing it down, but that's what they are saying. If I have 10 and sell 10, that's 100%, if I have have 10 and sell 15 now I have -50%. It basically means the store is selling more of the product that it has to sell.īasically if I have 10 apples and I sell 5, I have 50% inventory turn over.
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