How to Calculate Inventory Turnover?
Knowing how to calculate inventory turnover will help you find the rate at which your company replaces inventory within a specific period concerning sales. Suppose you intend to learn and implement inventory turnover calculations for your business. In that case, you will be able to state better pricing and look out for better marketing, purchasing, and manufacturing decisions.
When you look out to implement a well-managed inventory, you will eventually showcase your company sales to be at an optimal level. The inventory turnover ratio gives a verdict upon how a company generates sales from the inventory. In this article, you will learn about the proper steps to calculate the inventory turnover ratio.
Understanding Inventory Turnover Ratio
Inventory turnover ratio measures how efficiently a company manages its inventory. It indicates how many times a company sells and replaces its inventory during a period. Tracking this metric helps businesses optimize inventory levels.
Why Inventory Turnover Ratio Matters
The inventory turnover ratio provides valuable insights:
- A higher ratio means faster inventory sales and restocking.
- It shows how well purchasing and sales teams work together.
- It indicates if inventory levels match sales rates.
Monitoring turnover identifies issues like excess stock or poor sales. Companies can then adjust purchasing or marketing appropriately.
How to Calculate Inventory Turnover
The formula is:
Annual Cost of Goods Sold / Average Inventory
Follow these steps:
- Collect cost of goods sold from income statement.
- Add beginning and ending inventory, divide by 2 for average.
- Divide cost of goods sold by average inventory.
Higher ratios indicate efficient inventory management. Compare to industry benchmarks.
Improving Inventory Turnover
If turnover ratio is low, here are tips to improve:
- Forecast demand more accurately.
- Implement effective marketing campaigns.
- Automate inventory management.
- Frequently replenish top-selling items.
- Replace older inventory with newer items.
- Negotiate better deals with suppliers.
- Set optimal pricing for inventory.
Monitoring turnover ratio helps optimize inventory and sales. Companies can spot and address problems early on.
Next article: Popular Amazon Inventory Management Tools You Can Use For eCommerce Business
FAQs
What is the inventory turnover ratio?
The inventory turnover ratio measures how efficiently a company sells and replaces its inventory during a period. It indicates the number of times inventory is sold and replaced per year.
How do you calculate inventory turnover?
Divide annual cost of goods sold by the average inventory level. The average inventory equals (beginning inventory + ending inventory) / 2.
What is a good inventory turnover ratio?
The average inventory turnover ratio varies by industry. As a benchmark, retail is around 3-4x, grocery 12x, and auto parts 15-20x per year.
Why is the inventory turnover ratio important?
It shows how well purchasing and sales teams work together. It also indicates if inventory levels match sales rate. Tracking it helps optimize stock levels.
How can you improve inventory turnover?
Ways to improve low inventory turnover include forecasting demand better, running promotions, automating inventory management, replenishing top sellers faster, and pricing inventory optimally.
What happens if inventory turnover is too high?
An extremely high turnover over 20x may indicate inadequate inventory levels leading to stockouts. Some safety stock may help prevent losing sales.
What does low inventory turnover signify?
Low turnover under 3x can signal excess inventory tying up too much capital. It may require reduced purchases, improved marketing to stimulate sales, price adjustments, or newer inventory.
