#Calculating inventory turns plus#

This means that ABC Incorporated must restock their inventory approximately 10.5 times per year. Inventory turnover = Cost of Goods Sold / Average Inventory NOTE: Usually, COGS and average inventory are taken over the same twelve-month period, though some retailers will calculate inventory turnover more frequently. Once you have calculated the cost of goods sold and your average inventory, you will be able to calculate your inventory turnover. For example, a turnover ratio of 4 means your inventory turnover period lapses every 91 or so days (365/4). Now that we have these numbers, we can use the formula. Using the same example as before, the calculation would be: (90,000 + 120,000) ÷ 2 105,000. This means that ABC's average inventory for the year was $19,000. This measure is part of a set of Process. A high inventory turnover ratio usually indicates that products are selling in a timely manner, and that sales are good in a given period. Essentially, it indicates the speed at which a business can sell its inventory. Inventory turnover is a crucial business metric that gauges how many times a company sells and replaces its inventory within a given time frame, typically a fiscal year.

#Calculating inventory turns plus#

During that same year, ABC has a beginning inventory of $20,000 and an ending inventory of $18,000. Finished goods inventory can be calculated as beginning-of-year inventory plus end-of-year inventory divided by two. Inventory turnover: A defining business metric. Let's look at an example to see how it works.ĪBC Incorporated sold $200,000 worth of goods over the course of one year. This same formula can also be implemented at the individual product level, simply replace inventory turns with the number of units of that product sold per year.

Taking the average helps to give a more accurate result as inventory levels may vary greatly depending on the month or season. As an example, if your inventory turns over 10 times in a year, and said inventory has a 40 margin, your Turn and Earn would be 400 (40×10400). Though that may also indicate a potential for costly backorders. A raw materials inventory turnover rate higher than that means that a company’s raw materials are used and replaced frequently. To find this, you can add your beginning inventory and your ending inventory, then divide the sum by two. An inventory turnover ratio of between 4 and 6 is considered an ideal balance between sales and replenishment. To calculate a companys inventory turnover, divide its sales by its inventory. Average inventory is the average value of inventory that you had on hand during that same period. Inventory Turnover = Cost of Goods Sold / Average InventoryĬost of goods sold simply refers to the total of your sales during the period that you are calculating. You can find your inventory turnover ratio by using the following formula: