Inventory Turnover Ratio Calculator
Inventory Turnover Ratio Calculator
The inventory turnover ratio is a measure of how many times your average inventory is "turned" or sold in a certain period of time:
- Your Inventory Turnover Ratio
Find out your industry's average Inventory Turnover Ratio:
Whether you are running a small or big company, checking out the inventory turnover ratio is crucial for any industry to succeed. Without a good turnover ratio, it’s pretty impossible to pay bills and manage the overall performance of your company.
But how will you calculate this inventory turnover ratio? Well, don’t worry. With the help of our free tool, you can easily measure your inventory turnover ratio.
The process is straightforward. Just put the value of the cost of goods sold, beginning and ending inventory of a specific time, and get the result within a minute. Yeah, that simple it is.
What is the Inventory Turnover Ratio?
It shows how often a company can sell and replenish its inventory over a certain period of time. This ratio involves the costs of products sold and the average inventory for a particular time or year.
Inventory turnover is beneficial for businesses to understand the scenario of marketing, production, pricing, and purchasing in a better way and how to use their assets effectively to earn profits. Moreover, by analyzing the ratio low or high, you can predict weak sales with excess stocks or strong sales but insufficient inventory.
How do you calculate the inventory turnover ratio?
A company’s inventory turnover ratio measures how efficiently it turns its inventory into complete products and then sells them to customers. In simple words, it helps companies determine how well they can convert their stocks into goods to earn revenue.
Calculating the ratio is pretty simple and requires collecting the data and entering the value in our free inventory turnover ratio calculator.
The Inventory Turnover Ratio— is the division of the cost of goods sold (COGS) and the average inventory for a specific period. It determines how long it will take for a business to sell all the stocks and when they need to reorder.
How to calculate
The steps that you need to know to calculate the ratio are described below,
- In the first step, you have to collect the average inventory value, which is the average expense for a set of products for a defined time. It is the summing of the beginning inventory and ending inventory balance and making an average.
- In the next step, you have to divide this inventory balance by the cost of goods sold (COGS) for that particular time duration. The average inventory balance does not depend on yearly. You can measure it on a quarterly or monthly basis.
- And in the last step, just put the values using our free tool and click the calculate button to get the results. You can estimate the other value as well by clicking the reset button.
The formula: Cost of goods sold / average inventory.
The cost of goods is calculated from the income statement, and the inventory balance is related to the balance sheet.
- Income statement: It defines the financial condition of a company, which includes profitability, revenue, and costs.
- Balance sheet: It is derived from the company’s assets, equity, and liabilities at a given time.
With the help of this ratio, you can compare your company and other rivals on the market in terms of acknowledging how stable your inventory management is.
Why do we calculate the inventory turnover ratio?
- Companies tend to lock up a huge amount of money in their inventory without setting a realistic goal of much they should invest in it. And if the company fails to sell the entire product, it will be difficult for them to pay the bills of banks, suppliers, and employees. But if you calculate the inventory turnover ratio beforehand, you will not end up stocking up on the items blindly and can pay all the bills timely.
- By analyzing the inventory turnover ratio, companies can predict the demand for their goods on the market. It will help to balance the stockout and overstocking costs. For instance, with a high turnover ratio, the company should purchase more goods. And the lack of goods at hand can lead to losing customers, so it is important to monitor your inventory turnover.
- Another essential aspect of measuring the turnover ratio for any business is to take care of inventory management, which means when you have large quantities of goods but have fewer demands or maybe the opposite scenario. The ratio will help you understand the warehouse spaces you need for the stocks.
- If you want to identify the liquidity of a company, you must check the turnover ratio. A high turnover ratio is directly correlated with high liquidity. It indicates the company has a large inventory volume. And it receives money from clients frequently.
- In addition, your inventory may eventually become outdated or disintegrate if it is no longer in demand. And this may cause a massive loss for the company. Hence, keeping a good eye on the inventory turnover ratio is crucial to maintain track of the goods and their market demand over time.
Who should use the inventory turnover ratio?
The inventory turnover ratio is beneficial for comparing similarities between competitive companies in the market. It is basically advantageous in identifying how fast you can sell products and how often you need to refill the inventory. That is essential for businesses that sell automobiles, foods, time-sensitive products, and fast fashion.
What is inventory turnover with example?
Inventory turnover is a specific period that you should count from the day you first purchase an item to the day you finally sell it. In other words, a company must sell all of its stock plus any items lost to damage or shrinkage to achieve one complete turnover of inventory.
Let’s assume the cost of goods sold is 10,000$. Now, 400$ is the beginning inventory balance, and the ending balance is 600$ for a year.
So, the average inventory will be (400 + 600) /2 = $500.
So, the inventory turnover ratio is 10000 / 500 = 20.
The above ratio describes you have to finish and replace the inventory 20 times in that year.
And the inventory turnover days will be 365 / 20 = 18.25 = 18 days (approx).
The above days indicate you will take around 18 days to convert your inventory into sales.
Factors to consider when looking at your Inventory Turnover Ratio
- Locking up a lot of money in inventory will not do any good for a company. In this situation, a company should focus on turning the stock into sales to reduce the working capital.
- A low ratio indicates overstock or depletion in production. Inventory comes with high storage costs and zero returns. Overstocking is not beneficial for the business in any condition.
- Keeping a lot of products that you can’t sell quickly will take up a huge space in the warehouse and reduce storage for the new items.
- An increase in turnover ratio does not mean you are doing good. It indicates insufficient inventory that may lead to losing selling opportunities.
How to achieve a perfect turnover ratio?
There is no such term as a “perfect” turnover ratio, and it basically varies by industry. But you can apply certain ways to achieve it. So, what are they?
Streamlining supply chain
Never go for suppliers that offer low prices. Especially in conditions— when you need a product urgently or there is a sudden demand for a particular item in the market. In that case, streamlining the supply chain is the first thing you need to focus on to cut down the chances that may influence your profit margins and sales.
Adjusting the prices
The price of high-demand items should be adjusted to gain greater margins and to free up capital by letting go of obsolete or dead inventory. If you can’t sell products, try donating them to a charity or offloading them in other ways.
Help in forecasting
Sales numbers and inventory data are essential to improve inventory forecasting in a more accurate way. You can use this data to plan future sales, such as changing your product mix or bundling items creatively. So you can move towards potentially higher margins.
FAQs about Inventory Turnover Ratio
Below are frequently asked questions regarding Inventory Turnover Ratio
What is a good inventory turnover ratio?
An inventory ratio between 4 to 6 indicates there is a good balance between restocking the goods and selling the items. It may vary with the industries. But a good turnover ratio means neither you have a shortage of items nor a huge unsold product taking up a lot of space.
Is the inventory turnover ratio important for dropshippers?
Yes, the inventory turnover ratio is important for dropshippers to understand the overall performance of products, maintain the stockout and overstock and fulfill customer demand.