Inventory Turnover
Date created: Mar 1, 2019 • Last updated: Sep 27, 2019
What is Inventory Turnover?
Inventory Turnover measures how often, in a given time-period, your organization is able to sell its entire inventory. Inventory Turnover is an important efficiency metric and is helpful in analyzing pricing, product demand, and, of course, inventory purchase and costs. It is also a critical tool when selling perishable goods, where the potential for waste is high.
Formula
How to calculate
If a clothing retailer generates $1M in sales each month, with $400K in Costs of Goods Sold (COGS), and the start of the month inventory was valued at $45K and closed at $55K; Using the Sales method, Inventory Turnover = $1M / (( $45K + $55K ) / 2 ) = 20X per month Using the COGS method, Inventory Turnover = $400 / (( $45K + $55K ) / 2 ) = 8X per month
Inventory Turnover
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More about this metric
There are two types of calculations you can use: The Sales method and the Cost of Goods Sold (COGS)method. Using the COGS method produces a more accurate result because markup is not factored in.
Average Inventory value is calculated by adding the starting and ending inventory together and dividing by two.
Inventory turnover is an important indicator of the efficiency of your supply chain, the quality and demand of the inventory you carry, and if you have good buying practices. Generally speaking, a higher Inventory Turnover rate is better, while a lower Inventory Turnover rate suggests inefficiency and difficulty turning stock into revenue. Each type of industry will have different benchmarks and norms. For instance, a fresh produce supplier will have many more turns than a heavy equipment manufacturer.