Why Is Inventory Turnover Important?

Inventory turnover is important because a company often has a significant amount of money tied up in its inventory. If the items in inventory do not get sold, the company's money will not become available to pay its employees, suppliers, lenders, etc.

It is also possible that a company's inventory will become less in demand, perhaps become obsolete, or even deteriorate. If that occurs some of the company's money will be lost. Having slow-moving items in inventory also uses valuable space and makes the warehouse less efficient.

I assume that the risk of holding inventory was the reason for the quick ratio (also known as the acid-test ratio). In this financial ratio, inventory is excluded from the current assets that will be compared to the company's current liabilities.

While inventory is critical for meeting customers' needs, having too much of the wrong inventory items can result in financial problems.

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