Inventory turnover ratio - Formula | Calculator

Inventory

Why do we use it?

The inventory turnover ratio shows how effectively your inventory is managed. It reflects the two main components of a company's performance: stock purchase and sales.

What is the inventory turnover ratio?

Formula for calculating Inventory turnover ratio

Inventory turnover ratio = Cost of goods sold * 2 / (Beginning inventory + Final inventory)

The inventory turnover ratio is a measure of how many times your average inventory is "turned" or sold in a certain period of time. Put simply, the inventory turnover ratio indicates how many times you have managed to sell your entire stock in a year.

Who needs this information?

This information is useful to shareholders and business analysts, because the turnover ratio indicates the company's ability to sell its products. Inventory is any store's greatest asset and is often put up as collateral for loans, so creditors and banks are also very interested in knowing how easily the goods can be sold.

Calculate your Inventory Turnover ratio here

Cost of Goods Sold

Beginning Inventory

Ending Inventory

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Your Inventory turnover ratio is

Find out your industry average inventory turnover ratio

Here are some points to consider when looking at your business' inventory ratio:
Having a lot of cash tied up in inventory is bad for the company. If you're in this position, you may need to convert the inventory into sales and free up some working capital.
A low inventory turnover ratio may be due to overstocking or deficiencies in product manufacturing or marketing. Inventory has zero returns and high storage costs, so overstocking really doesn't help your business.

Stocking a large number of items that don't sell quickly could also mean that you end up with a warehouse full of obsolete products and don't have enough storage for the latest products.
However, a high turnover ratio does not always indicate a better performance. It can also mean that you have inadequate inventory, which leads to lost sales opportunities.
Ordering insufficient quantities of your products can also cause you to miss out on bulk discounts and delivery savings.

Strategies to improve sales of slow-moving products

Identify and markdown old products that are obsolete or no longer trending

Introduce discounts and product giveaways

Conduct contests and offer deals on social networks

Find ways to turn extra inventory into a tax write-off

How to achieve Ideal turnover ratio

The ideal inventory turnover ratio varies from business to business. The best solution is to adopt an inventory management system that can gather essential statistics, determine the economic order quantity, and find the perfect balance for your business. You can also find which products are selling best, maintain optimum stock levels, and even automate your stock management, so it is a great deal for any business.

Related Free Tools Free SKU Generator Free Purchase Order Generator Economic Order Quantity Calculator Break Even Point Calculator Reorder Point Calculator

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