In this case, we calculated the inventory turnover period on a daily basis as 365 days, but if you want to calculate it on a monthly basis, you can divide it by 12 to calculate the inventory turnover period, depending on the period you want to know. Indicating that the inventory is approximately replaced every 37 days (365 days / 10 replacements) In contrast, the actual sales amount does not provide an accurate depiction of the situation since it includes the markup of sold goods.įor example, using the formula "Sales/Inventory”, if inventory is 1 million USD and annual sales are 10 million USD, the calculation is "Sales $10 million USD / Inventory $1 million USD = turnover ratio of 10.
The rationale behind using cost of sales instead of sales is rooted in the fact that the average inventory value represents the costs of purchased goods.
INVENTORY TURNOVER FORMULA IN TIMES PLUS
"The value of the inventory of goods at the beginning of the year PLUS the purchase value of goods for the year MINUS the value of the inventory of goods at the end of the year”. The cost of sales for the year is calculated by using the following formula: The inventory turnover ratio can be calculated by dividing the annual cost of goods sold (cost of sales) by the average inventory value. Below, we will define the most common ways of calculation. However, it can be calculated using simple calculations based on monetary values and the number of items. Inventory turnover is often thought to be difficult to calculate.
INVENTORY TURNOVER FORMULA IN TIMES HOW TO
How to calculate the inventory turnover ratio A product with a low inventory turnover ratio could result in storage and disposal costs, so it is important for a company to take measures to prevent inventory buildup. If the inventory turnover per month is calculated as "1 for A" and "3 for B," it can be determined that B is selling better. Generally, high ratios are better than low ones.Īs an example, suppose there are two products, A and B. The inventory turnover ratio serves the purpose of visualizing the movement of inventory. The purpose of the inventory turnover ratio Inventory turnover is useful as a reference for management strategy and inventory control, assuring that they are aligned with the company's business situation and goals. It can be calculated using cost of sales and average inventory value, calculated from the number of inventory items, and visualized as inventory trends.
It is a financial ratio showing how many times a company has sold and replaced inventory during a given period. Inventory turnover, also known as merchandise turnover, is an indicator of how inventory changes over a given period of time. This article defines the inventory turnover ratio, how it is calculated, the benefits of paying attention to it, and how to improve it. Knowing the inventory turnover ratio helps to visualize the sales of products, thus avoiding unnecessary inventory and reducing costs. Inventory turnover can be calculated by value or quantity and is used to visualize the flow of inventory. Are you familiar with the concept of inventory turnover, but would you like to learn more about its calculation and purpose?
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