Inventory Turnover
Learn how to calculate inventory turnover. Includes a definition, examples, and frequently asked questions about the inventory turnover ratio.
Updated on August 20th, 2021
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Inventory turnover is a measure of how much inventory a business has sold and purchased during a given period. Measuring inventory turnover helps companies to plan their purchases so that inventory levels are neither too high nor too low to meet demand.
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How to Calculate Inventory Turnover:
You can find your inventory turnover ratio by using the following formula:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Cost of goods sold simply refers to the total of your sales during the period that you are calculating. Average inventory is the average value of inventory that you had on hand during that same period. To find this, you can add your beginning inventory and your ending inventory, then divide the sum by two. Taking the average helps to give a more accurate result as inventory levels may vary greatly depending on the month or season.
Let's look at an example to see how it works.
ABC Incorporated sold $200,000 worth of goods over the course of one year. During that same year, ABC has a beginning inventory of $20,000 and an ending inventory of $18,000. This means that ABC's average inventory for the year was $19,000.
Now that we have these numbers, we can use the formula.
Inventory turnover = Cost of Goods Sold / Average Inventory
Inventory turnover = $200,000 / $19,000
Inventory Turnover = 10.5
This means that ABC Incorporated must restock their inventory approximately 10.5 times per year.
Average Inventory Turnover Ratios by Industry:
Industry | Inventory Turnover Ratio |
|---|---|
Financial | 1,125.4 |
Utilities | 13.7 |
Transportation | 23.8 |
Services | 34.0 |
Retail | 8.1 |
Energy | 12.5 |
Technology | 9.5 |
Basic Materials | 6.2 |
Consumer (Non-Cyclical) | 7.3 |
Consumer (Discretionary) | 7.0 |
FAQs:
How do you calculate inventory turnover?
You can calculate inventory turnover using the following formula:
Inventory Turnover = Cost of Goods Sold / Average Inventory
What's a good inventory turnover ratio?
Average inventory turnover ratios vary by industry, so it is difficult to say. Some experts say that inventory turnover between 6 and 12 is "good," but it may be different for your business.
What does inventory turnover mean?
Inventory turnover is a measure of how much your inventory needs to be restocked during the course of a month, season, or year.
Is high inventory turnover good or bad?
High inventory turnover indicates that your company is selling products quickly. As long as you can keep up by replacing your product quickly, high turnover is a good thing. Low inventory turnover indicates that you are having difficulty selling your goods.
How do you calculate inventory turnover in Excel?
If you know your total cost of goods sold, and your average inventory value for the same period of time, you can calculate your inventory turnover in Excel by dividing the cost of goods sold by the average. To do this, divide the cell with the total value by the cell with the average value. For example: A1/A2.
What does "inventory days" mean?
Inventory days, or days in inventory, refers to the number of days that products are in your inventory before being sold. Essentially, it is inventory turnover measured in days. This is calculated using the following formula:
Days In Inventory = Average Inventory/(Cost of goods sold/365).
What causes inventory turnover to increase?
An increase in sales will lead to increased inventory turnover as you sell a larger volume of products.
How do you convert inventory turnover to days?
You can convert inventory turnover to days using the following formula:
Days In Inventory = Average Inventory/(Cost of goods sold/365).
How do you calculate inventory turnover on a balance sheet?
If your balance sheet includes the total cost of goods sold, and your average inventory value for the same period of time, you can calculate your inventory turnover on a spreadsheet by dividing the cost of goods sold by the average. To do this, divide the cell with the total value by the cell with the average value. For example: A1/A2.