Inventory turnover formula

This results in obsolete inventory or dead stock that increases holding costs, and costs time and money to move out. When you have low inventory turnover, you are generally not moving products as quickly as a company that has a higher inventory turnover ratio. Since sales generate revenues, you want to have an inventory turnover ratio that suggests that you are moving products in a timely manner.

Increase your marketing budget and loop in experts who can develop and execute a solid digital marketing strategy. Product kitting or bundling is a common inventory management technique that can boost inventory turnover. This strategy gives customers a better deal if they buy items as a set, which encourages them to buy more products. If the deal encourages enough customers to spend more money and buy more products, your turnover rate can increase. This technique is especially helpful for a retailer trying to move products before demand drops off and to prevent merchandise from becoming dead stock.

Average Inventory

Average inventory is typically used to even out spikes and dips from outlier changes represented in one segment of time, such as a day or month. These retail platforms allow you to easily manage your inventory and report fluctuations so you won’t have to do any manual calculations. If you’re a Finale Inventory user, you can also access your COGS through our inventory accounting reports. To explain how to calculate and interpret the I/S ratio, we’ll use an example. Average inventory does not have to be computed on a yearly basis; it may be calculated on a monthly or quarterly basis, depending on the specific analysis required to assess the inventory account. By placing them in the same category, you can compare how they perform on the shelves.

  • Brightpearl’s retail operations platform helps retailers stay on top of their data.
  • Panelists and compilers of industry data frequently use net sales as the numerator in the inventory turnover equation.
  • Units sold is the number of units that were sold during the period being analyzed.
  • With a well-balanced supply-and-demand chain, your business should be able to stay in the clear.

The inventory turnover measure can be incorporated into an organization’s budgeting and management systems, so that it can take the actions noted below. For both solutions, ShipBob offers an international fulfillment network and dashboard with a built-in inventory management system. Let’s also say that it takes you twice as long to sell through the 300 pillows as it does to sell through 300 electronics. In this case, you’re also doubling storage again, for a whopping 24x in warehousing costs and much less potential profit. A low inventory turnover could mean that the product isn’t priced properly, that there isn’t much demand for the product, or that it isn’t positioned properly. There are many other inventory management indicators that you can use, but the combination of the three metrics defined here can go a long way towards the success of your online retail business.

Next, you need to calculate your average inventory for the same given period of time.

And more than a quarter of consumers will abandon their online purchase if same-day shipping isn’t available. Calculating your COGS can be complex and involves reviewing and analyzing financial statements, so if you have questions, don’t hesitate to reach out to your financial advisor or tax professional. Some inventory management software can also automatically calculate this for you. Regularly review your product portfolio to determine your best-selling items.

Inventory Turnover and Inventory Sale

Compare your prices with similar businesses and products in your industry. If other companies are pricing things much higher or lower, change your pricing to be more competitive. Going with the same example we used before, compare your inventory turnover rate of “10” with other bookstores in your area. Your inventory turnover ratio is an important KPI that you should be keeping an eye on. Think of it as the canary in your retail coal mine—if it starts to drop, you know there’s crucial work to be done optimizing your purchasing and adjusting your sales tactics. Another formula you can add to your arsenal to gauge inventory turnover is the Days Sales of Inventory (DSI).

What Is Inventory Turnover Ratio?

There are multiple ways to calculate the inventory turnover of a company. The cost of goods sold (COGS) can be divided by the average inventory. A high inventory turnover generally means that goods are sold faster and a low turnover rate indicates weak sales and excess inventories, which may be challenging for a business. An easy way to increase your inventory turnover rates is to buy less and buy more often. When determining whether your inventory turnover rate is good or bad, you need to compare it to how other businesses in your industry are performing. In other words, compare your apples to other apples—not oranges or mangos.

On another hand, if your inventory isn’t moving as quickly, then you may need to evaluate your sales, marketing, and inventory practices to see how you can improve. Now that you know why you should measure stock turn (and how to do it) let’s look at some of the ways to improve your inventory turnover ratio. Panelists and compilers of industry data frequently use net sales as the Inventory Turnover and Inventory Sale numerator in the inventory turnover equation. The prime motivation for this practice is the reluctance of companies to share their fine-grained gross margins. Indeed, sales in volume are considered as less sensitive because selling prices are already public anyway. Yet, the two companies have roughly the same working capital requirements as far as their inventories are concerned.

Define the period of time you want to use.

The inventory turnover ratio for each of your products can help you determine how marketable your goods are and how effective your marketing is. However, it can also mean you’re not putting in big enough orders when you restock. If your inventory turnover ratio is exceptionally high, your customers may be frequently running into empty shelves as they wait for you to reorder goods. Since this can drive customers away, it’s important to keep an eye on how often you end up totally out of stock. Being a pro retailer means more than knowing how to sell the right products to the right customers. You need to be an expert in inventory management as well—and you need to know how to marry sales and inventory to optimize your business.

Turns, much like safety stocks, are a balance between various risks, primarily the cost of inventory and the cost of stock-outs. Yet, those built-in capabilities are invariably simplistic with regards to the company’s specificities. Thus, in practice, those KPIs require bespoke implementations, which frequently exceed the capabilities of the BI (business intelligence) tools that are not geared toward complex financial engineering.

What Is a Good Inventory Turnover Ratio?

Using this information, the company decides to adjust their strategy next quarter. Some compilers of industry data (e.g., Dun & Bradstreet) use sales as the numerator instead of cost of sales. Cost of sales yields a more realistic turnover ratio, but it is often necessary to use sales for purposes of comparative analysis.

  • The formula can also be used to calculate the number of days it will take to sell the inventory on hand.
  • Keeping a close pulse on your inventory turnover rate — one of many health metrics for an ecommerce business — can help you better understand areas of improvement.
  • Knowledge of consumers’ buying habits makes it much easier to forecast demand accurately, and helps you optimize your inventory levels throughout the year and across locations.
  • An inventory turnover ratio any lower than two could indicate that sales are weak and product demand is waning.
  • Aim to increase inventory purchase amounts to bring your ratio down to a more moderate, and profitable, range.
  • While the inventory turnover ratio and the inventory-to-sales ratio measure the overall efficiency of your inventory, the sell-through rate is often used to measure the performance of individual products.
  • Average inventory is typically used to even out spikes and dips from outlier changes represented in one segment of time, such as a day or month.

Understanding inventory turnover ratios will help you increase profitability and make better business decisions in the long term. It shows how many times your business has sold (and replaced) inventory during a given period of time. This figure is important because it allows businesses to frame their financial footsteps.