Your Average Inventory (AI) is calculated by: (Your Ending Inventory Balance + Your Beginning Inventory Balance) / 2Įxample: Your ending inventory balance is $150,0000. You can obtain this information by looking at your closing inventories and opening inventories. Your Average Inventory (AI) is a calculation (or a very good estimate) of the value of your company’s inventory over a set period of time. Step 1: Calculate Your Average Inventory (AI) Keep in mind each time period is different depending on the industry, so periods will range from yearly to quarterly or monthly.Ĭost of Goods Sold is also known as Cost of Sales or Cost of Services. There are a few steps to calculating your inventory turnover, including first calculating your Average Inventory and Cost of Goods Sold. Are you selling inventory quickly or does the majority of your inventory tend to sit in the warehouse? Should you be ordering more inventory to increase sales? Should you try to market your merchandise differently? When you know your inventory turns ratio, it will be easier to confidently answer these questions.īut first, you need to know how to calculate your inventory turnover ratio. Knowing how to properly understand and calculate your inventory turnover can lead to promising news for your business. If you are making correct buying choices based on what you think your vendors, clients, customers, or even patients will need.How often you are restocking and moving inventory.Here is what inventory turnover tells you: You can also compare your turn ratio to past averages over the same duration of time to see how sales and inventory turnover are comparing from one period to the next. After all, you wouldn’t want to keep valuable inventory and supplies in stock if you’re not going to use them to provide goods or services-those funds could be better used elsewhere to build your business. When a business knows how to measure inventory turns properly, it means there is good inventory management, which leads to greater profit over time. Inventory turnover tells you how well inventory is moving through your business. What does inventory turnover measure and tell me about my business? Other terms for inventory turnover include inventory turns, merchandise turnover, stock turnover, stock turns, and turns. For example, if you sold 500 units of inventory last year and had 500 units in your warehouse, then your ratio is 1 (1:1). Inventory turnover ratio is the ratio between sales or usage and current inventory in stock. Optimizing your inventory turnover rate and only keeping what you need in stock helps your business stay efficient and profitable. Inventory turnover is important because it reveals whether your business stocks excessive inventory, relative to what your company actually uses or sells. Inventory turnover refers to how many times a company has sold and replaced inventory over a specific time period, typically a year. In this article, we’ll define inventory turnover, provide expert tips on how to improve inventory management, and explore how inventory management software can help you calculate and leverage your inventory turnover rate. No matter your business’s size, understanding inventory turnover is a necessity.
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