So, here’s an example of an inventory turnover ratio with both methods. Seeing a calculation in action always makes it easier to understand. Example of Inventory Turnover Ratio To Make It Clearer Therefore, you get a better picture of how much you’re spending on the inventory and how fast you’re selling it. This is because you don’t include any additional profits when calculating COGS. If you’re unsure which method to use, the second one is generally more accurate. Again, divide this value by the average inventory value, and you’ll have your inventory turnover ratio. These are all the costs you bear to sell the items. The other answer for how to calculate the inventory ratio from balance sheets is the cost of goods sold (COGS). Just divide the sales you made in a particular year by the average inventory value. Now, using this value, you can take two routes to calculate the inventory turnover ratio. Here’s how to calculate it.Īdd the value of the beginning inventory to the ending inventory during a period (year, month, or quarter). However, to cater to this, you must calculate the average inventory value. That’s why seasonal pricing is an effective strategy to increase performance. But the next season, the same item might be lying idle in your warehouse. You might get massive sales of a particular item in one season. But before that, there’s one other thing you must keep in mind.Īll seasons are not the same. Now that you know what inventory turnover is and why it’s important, it’s time to take your calculators out.
How To Calculate Inventory Turnover Ratio From Balance Sheets? No matter how you look at it, there will be more money in your pocket. If you find your turnover isn’t good, you can make better decisions accordingly and, again, increase your profits. Moreover, you won’t be wasting money on extra items. When nobody will leave disappointed due to a shortage of an item, your sales will increase. Secondly, it helps you increase your profits. After all, that’s what business is all about, isn’t it? With the right amount of items in your inventory, you’ll efficiently manage all customer demands. You’ll also be dodging the risks that excess inventory brings with it. If you know how fast you’re selling, you won’t be buying too much or too little. You might calculate it for a month, a quarter, or a year, but the resulting value will always work wonders for you.įirstly, it saves you from entering financial tight spots.
In simpler terms, it’s a measure of how fast or how slow you’re selling. These numbers are important industry benchmarks that tell you how good your business is doing.Īll these terms mean the same thing: the number of times you sell and refill your inventory. That’s because these are other words for inventory turnover. If the words stock turn, stock turnover, or inventory turn ring a bell, you’re already familiar with this topic. What Inventory Turnover Tells You and Why Is It Important? So, if you’re ready to learn what inventory turnover measures and how to calculate it, let this article guide you. You just have to keep an eye on your sales and stock. It tells you how your business performs and gives you ideas of what you must do to make things better. It is one of the best metrics to rely on for making informed decisions and avoiding chaotic situations.
So, whether you’re running a restaurant or retail shop, you must know how to calculate inventory turnover. But knowing how much you need at what times can keep you at a balance. Other times, companies don’t have enough items to fulfill customer demands. Sometimes, a full stock becomes a burden.