Inventory turnover ratio = (cost of goods sold) / (average inventory for the period) What is considered a good inventory turnover rate? Use the following formula to calculate your inventory turnover rate: Once you have the variables above, determine your inventory turnover rate by dividing the cost of goods sold by the average inventory. Using the figures from June or the end of summer wouldn't be an accurate representation of your average inventory. For example, you could have a large inventory of swimsuits in June but by summer's end, the inventory for this product could be nearly depleted. This is because it's common for businesses to have fluctuating amounts of inventory throughout a given period. Rather than using an exact amount of inventory, you'll need the average inventory for your company. Determine your company's average inventory You can find this number on your company's income statement. This can include the cost of labor, materials and more. The cost of goods sold refers to the cost it took to produce said goods. To calculate your inventory turnover ratio, you'll need the cost of goods your company sold. Here are the steps you'll need to take: 1. To evaluate the rate at which you're able to turn your inventory into a sale, you'll need to accurately calculate your inventory turnover rate. Related: Learn About Being an Inventory Clerk How to calculate inventory turnover Ultimately, inventory turnover helps make sure you're not overbuying inventory and spending excessive amounts of money to keep it in stock with no one interested in purchasing it. For example, if you sell a customer a pair of pants but later determine you don't have any in stock, your inventory turnover will be off because there wasn't any inventory to "turn" or give to the customer. This ensures a consumer's demands are being met. Additionally, the number of sales made for a particular good needs to align with the number of goods in stock. If a lot of these products aren't sold, you'll begin to pay for the cost of keeping these goods on store shelves or in storage. For starters, if your company receives a large stock of products, your sales department will have to sell a large stock of products. Inventory turnover is important for several reasons. Related: Learn About Being an Inventory Specialist Why is inventory turnover important? It also lets you know whether you're keeping too much inventory on hand and having to pay storage and other fees because of this. The inventory ratio helps you to determine how well your inventory is being turned into sales. In other words, it's the rate at which your company's inventory is "turned" or "sold" to consumers. The rate of this, known as the inventory turnover rate, is the number of times this turnover happens. Inventory turnover refers to your company's ability to replace its inventory in a given period. Related: Learn About Being an Inventory Manager What is inventory turnover? In this article, we will define inventory turnover and provide you with the steps in calculating the inventory turnover rate for your business. This helps you determine whether or not you're effectively able to manage your product stock, how quickly your products are selling, how great the product demand is for the goods you sell and how quickly you're able to sell products in comparison to other companies in your industry. As a business owner, it is helpful to calculate your business' inventory turnover rate.
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