There are a few steps to calculating your inventory turnover, including first calculating your Average Inventory and Cost of Goods Sold. Are you selling inventory quickly or does the majority of your inventory tend to sit in the warehouse? Should you be ordering more inventory to increase sales? Should you try to market your merchandise differently? When you know your inventory turns ratio, it will be easier to confidently answer these questions.īut first, you need to know how to calculate your inventory turnover ratio. Knowing how to properly understand and calculate your inventory turnover can lead to promising news for your business. If you are making correct buying choices based on what you think your vendors, clients, customers, or even patients will need.How often you are restocking and moving inventory.Here is what inventory turnover tells you: You can also compare your turn ratio to past averages over the same duration of time to see how sales and inventory turnover are comparing from one period to the next. After all, you wouldn’t want to keep valuable inventory and supplies in stock if you’re not going to use them to provide goods or services-those funds could be better used elsewhere to build your business. When a business knows how to measure inventory turns properly, it means there is good inventory management, which leads to greater profit over time. Inventory turnover tells you how well inventory is moving through your business. What does inventory turnover measure and tell me about my business? Other terms for inventory turnover include inventory turns, merchandise turnover, stock turnover, stock turns, and turns. For example, if you sold 500 units of inventory last year and had 500 units in your warehouse, then your ratio is 1 (1:1). Inventory turnover ratio is the ratio between sales or usage and current inventory in stock. Optimizing your inventory turnover rate and only keeping what you need in stock helps your business stay efficient and profitable. Inventory turnover is important because it reveals whether your business stocks excessive inventory, relative to what your company actually uses or sells. Inventory turnover refers to how many times a company has sold and replaced inventory over a specific time period, typically a year. In this article, we’ll define inventory turnover, provide expert tips on how to improve inventory management, and explore how inventory management software can help you calculate and leverage your inventory turnover rate. It is calculated by adding the value of inventory at the end of a period to the value of inventory at the end of the prior period and dividing the sum by 2.No matter your business’s size, understanding inventory turnover is a necessity. Secondly, average value of inventory is used to offset seasonality effects.
Some companies may use sales instead of COGS in the calculation, which would tend to inflate the resulting ratio.
Analysts use COGS instead of sales in the formula for inventory turnover because inventory is typically valued at cost, whereas the sales figure includes the company’s markup. Inventory Turnover = Average Value of Inventory COGS where: COGS = Cost of goods sold Ĭost of goods sold (COGS) is also known as cost of sales. Investopedia / NoNo Flores Inventory Turnover Formula and Calculation