And that most high-performing businesses maintain inventory turnover rates of between 5 and 10.īut a “good” inventory turnover ratio, like a "good" inventory shrinkage, varies among industries. What Is a Good Inventory Turnover Ratio?Ĭommon knowledge states that an inventory turnover rate below 5 isn’t very good. You need to be confident that yours is accurate. Inventory turnover ratio is one of the most important inventory KPI.
#INVENTORY TURNOVER FORMULA PEARSON SOFTWARE#
Second, if you don’t have inventory management software or a B2B ecommerce platform, look into getting it. First, look into the inventory control automation system you use for an inventory turnover ratio calculator. If you’re not keen on manually calculating your inventory turnover ratio, you have two options.
#INVENTORY TURNOVER FORMULA PEARSON HOW TO#
How to calculate inventory turnover ratio is usually built into that type of software. Most businesses calculate inventory turnover ratio using automated inventory management platforms. Our business sold and replaced its coffee stock 11 times over the inventory period. Step 3: Calculate Inventory Turnover Ratio Inventory Turnover Rate = $6,600 / Average Inventory Inventory Turnover Rate = $6,600 / Inventory Turnover Rate = $6,600 / Inventory Turnover Rate = $6,600 / $600 Inventory Turnover Rate = 11 This means that, over a period of one month, the cost spent to acquire and produce the bags of coffee that ultimately sold was $6,600. This number can also be expressed in units to calculate inventory usage rate. Starting inventory = 1000 pounds or $6,000 Received inventory = 900 pounds $5,400 Ending inventory = 800 pounds or $4,800 COGS = $6,000 + $5,400 - $4,800 COGS = Starting Inventory + Received Inventory - Ending Inventory COGS = $6,600 Now that you have the three key numbers we need for COGS, we can calculate it.
At the end of the six-month period, we count our inventory again and we have 80 pounds of unroasted green coffee beans. Throughout the six-month period, we receive 500 pounds of unroasted green coffee beans. Let’s say we have 100 pounds of unroasted green coffee beans at the outset. In this example, let's pretend we’re a coffee roasting company calculating inventory turnover ratio for pounds of coffee over a six-month period. To calculate inventory turnover ratio, we need COGS and average inventory. How to Calculate Inventory Turnover Ratio: Example Let’s walk through it step-by-step with an inventory turnover equation example. Once you have your COGS and average inventory, the inventory turnover formula is simple: Inventory Turnover Ratio = Cost of Goods Sold (COGS) / Average Inventory Here’s how to calculate average inventory level: (Beginning Inventory + Ending Inventory) / 2Īll it is is the sum of beginning and ending inventory-from a specific time period-divided by two. Average the InventoryĪverage inventory is the estimation of the value ($) or number (units) of certain types of inventory at any given time over a set time period.
If you don’t, here’s how to calculate COGS and how to calculate ending inventory. Two things allow you to figure out how to calculate inventory turnover ratio. Whereas inventory turnover ratio tends to be used for longer time frames, like quarters or years. And it’s typically calculated for shorter inventory periods, like weeks or months. It’s similar to the inventory turnover ratio meaning, but it relates inventory to total sales, not COGS.
The stock to sales ratio formula is: Stock to Sales Ratio = Inventory Stock ($) / Sales ($) Stock to sales ratio is an inventory management metric that shows the relationship between the value of your stocked inventory (from using inventory costing methods ) and the value of your sales over a given period of time.
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