Calculating Inventory Turnover

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Have you ever been asked about your “inventory turnover”?  What a bizarre term!  Well, inventory turnover is a ratio that many people use to judge the quality of your operation.  It basically refers to how many times per period your company’s inventory is sold and replaced.  Calculating your turnover rate can help you determine if your inventory turnover is low or high. If your inventory turnover rate is high, you’re on the right track. You’re likely employing all the necessary inventory management techniques such that inventory is not sitting around. If the turnover rate is low, you need to re-evaluate your company’s inventory management practices as you are tying up your company’s cash possibly longer than you need to.

You can use automated inventory management software or just regular inventory management software to calculate your company’s inventory turnover rate.

Take a look at your inventory management system, whether you make use of online inventory management, automated inventory control, or some kind of inventory software. You should be able to figure out how much inventory you have on hand at any point in time.  Typically you use average inventory in the calculation, so you will need to know the beginning and ending inventory if you don’t know the average.  Add them up and divide by two.

To calculate your inventory turnover rate for a period (usually done on an annual basis) divide your sales for the year by the average amount of inventory you had on hand for the year. (Note – Some people use Cost of Goods instead of sales).  The result that you get after dividing your sales by your inventory will give you a picture of how healthy your inventory practices are for your company. Your best bet is to get some averages for your industry and compare yourself to those.  An average grocery store inventory turnover will be much higher (average 12+), for example than a manufacturing company (average 6-8).