How to Calculate Inventory Turnover
Inventory turnover is a ration that shows you how many times your inventory is sold and replaced over a period of time. It is a very useful ratio to be aware of for any store that carries inventory, and one that can give a lot of information about your sales. There’s no reason not to track inventory turnover, and calculating it is actually a very simple process. Here’s how.
- Select a period of time you want to know your inventory turnover for. This can be a month, a quarter, a year, or any other period you want.
- Find out the cost of goods sold (COGS) for your inventory during that period.
- Find out the average value of your inventory on hand.
- Divide the cost of goods sold by the average value of inventory on hand.
- The number you get is your inventory turnover for that period.
Cost of goods sold/Average value of inventory on hand=Inventory Turnover
Your inventory turnover will be the number of times you go through your inventory during the period you selected. If you determine a cost of goods for a one year period is $1000, and the average value of inventory on hand is $20, you will know the inventory turnover is 50. This means you are able to go through your inventory 50 times in that one year period.
Now that you’ve got the number, what does it mean? You might think that you’d want the highest posible inventory turnover, but this is not necessarily true. While a high inventory turnover can mean strong sales, it can also indicate that you do not carry enough items in your inventory. A low inventory turnover is definitely not good, as it usually means poor sales. You want a number somewhere in the middle, where you have a good sized inventory that you go through regularly.
Inventory turnover rates usually vary for different industries. Do some research on inventory turnover rates in your industry and find out how your rate compares. Finding the right sized inventory to have a good inventory turnover rate can be great for your business.
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