You’ll have to calculate two numbers to do the inventory turnover calculation: COGS and average inventory.Īverage inventory (which you get by adding the beginning inventory and ending inventory and dividing that number by 2) is vital because your company’s inventory can fluctuate throughout the year.įor example, a big-box retailer may stock up on more inventory to accommodate higher sales around a high-volume period of time like Black Friday or Christmas. Divide it by the average inventory within that same period.Take the cost of goods sold (COGS) within a given period.You can use a formula to calculate it, giving you an exact number to go by. The inventory turnover ratio isn’t a matter of guesswork. How to calculate the inventory turnover ratio Alternatively, if a product is seeing strong sales, you might stock up on similar products to boost the amount of inventory you have. Another option is to find different suppliers. Purchasing: If your inventory is selling too quickly, you may need to increase the number of times you replenish orders.Marketing: If inventory is moving slowly, do you need to ramp up your marketing? You might put a product in the spotlight, making it more visible to buyers.Pricing: If inventory is selling too slowly (low turnover), is it time to set a discount (like a two-for-one deal)? Alternatively, if your inventory is selling too quickly (high turnover), you might want to raise your prices.You can use the inventory turnover ratio to make business decisions about things like: In contrast, demand might be on the rise in the case of high inventory turnover. The demand for these items is inherently higher, contributing to a faster turnover.īut why does inventory turnover ratio matter? Inventory turnover can give valuable information about the health of your business.įor example, you might face decreased consumer demand in the case of low inventory turnover. In contrast, consumer goods like personal care products and foodstuffs have shorter production times, sell quickly, and sell a lot. It allows you to increase your operational efficiency in a number of ways.įor example, if you sell high-end luxury goods like fancy cars or handbags, you’ll know that they have long production periods, take more time to sell, and generally sell fewer units in a given year. Then, I’m going to show you how to apply the inventory turnover ratio formula.įor distributors, the average inventory turnover (and what makes a good inventory turnover) depends on your industry. In this article, I’m going to start by explaining what the financial ratio is and why it’s important. Don’t stress: The formula for figuring out this financial metric is pretty straightforward. If you’ve never calculated your inventory turnover ratio, you might be worried that you’re about to deal with complicated financial formulas and complex math. With this data, you can make smarter decisions about inventory management. The inventory turnover ratio is a financial indicator that shows how frequently a company uses and replaces inventory within a set time period.įiguring out your inventory turnover ratio can help you make smart choices about things like purchasing, pricing, and marketing inventory. The key to success? Knowing your inventory turnover ratio. You’ve got to strike the right inventory balance between having too much versus too little product. It’s also sometimes hard to unload excess inventory, so you stand to lose money. It’s a bit like the story of “Goldilocks and the Three Bears.”īasically, you have to make sure that inventory levels are just right so there’s enough product to meet consumer demand without overstocking, which can result in excess inventory taking up space you might not have.
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