RecognizingSuccess 125its relative liquidity by measuring the speed of its sale. Inventory
speed, or turns, is measured by the relationship between the cost of
goods sold (COGS) during a period and the average level of inven-
tory during that period:
Current year’s cost of goods sold
(Beginning inventoryending inventory)/2Inventory turn levels are reliable indicators of the quality of in-
ventory management. The longer inventory sits aroun dwithout being
sold, the less value it adds to the business, since it could be con-
verted into cash deployed for more productive uses. High inventory
levels also increase the risk of obsolescence or spoilage, require large
amounts of either cash or bank borrowing to finance, an dpose the
risk of loss if the market price at which they can be sol d declines
materially.
GE is well known for its inventory turn management, an dits
long-time CEO, Jack Welch, regularly reports this in his annual let-
ters. GE boasts inventory turns of a robust 8 ami da conglomerate
average inventory turn of about 7 though shy of the S&P 500 average
inventory turn of about 10. Microsoft manages inventory well too,
right along with the rest of the computer industry, with turns of
about 15; this is larger than GE in part because of the vastly different
products these businesses sell.
But Amazon.com is superefficient in inventory management, at
a breakneck pace of aroun d20. Amazon.com is a specialist in just-
in-time inventory, a key management strategy developed in the last
couple of decades that Amazon.com has taken to new levels. Stock
doesn’t sit idle in Amazon.com’s warehouses, and this swift turn-
over lowers costs. That enables the business either to charge lower
prices to its customers (hence Amazon.com’s aggressive pricing dis-
counts) or to continue to charge the market price but generate more
profit.
Receivable Turns
A company’s credit policies can be its Achilles’ heel or a driver of
efficiency. Too many sales on credit or too many delinquencies or
uncollectible accounts can crush cash flows. Speedy collection en-
hances liquidity and can enable a company to get its customers to
finance its business. Receivable turns are measure dby cre dit sales