Low inventory turnover, however, can lead to a host of problems.

Internet, Mail Order, & Online Shops: 9.54įor the rest of this post, we’re going to assume you’re struggling with low inventory turnover since high inventory turnover typically just means you need more stock to cover consumer demand.

Here are a few industry averages that might apply to you, as found on market research and analysis website CSIMarket: To know whether your inventory turnover rate is high or low, you’ll want to compare it to your industry’s average. Once you know your rate of inventory turnover, you can assess how to improve it. What’s a Good Rate of Inventory Turnover? That means 9.29 times out of the year, your inventory completely turned over. To calculate your inventory turnover rate, divide your COGS by your average inventory, which in this case gets us a rate of 9.29. Check out this post to learn more about the general methods for going about this.įor our example, let’s assume your COGS for the past 12 months is $130,000. Calculating Rate of Inventory TurnoverĬalculating your Cost of Goods Sold is a bit complicated and depends greatly on your products and business. Then, divide your total amount of inventory by the number of months you’re calculating (12 in this example) to get your average inventory for that period.įor example, let’s assume that the past 12 months you had varying inventory costs that added up to $168,000.ĭivide $168,000 by 12 months and you get an average inventory of $14,000. If you want to calculate your average inventory for a single fiscal year (12 months), you’ll first want to find the inventory counts from the end of each month (in dollar value) and add them all together. To calculate your inventory rate, you first need to calculate your average inventory. Sales include a markup over costs, which could inflate your inventory turnover rate.ĬOGS divided by average inventory can give you a more accurate rate of inventory turnover. Most analysts don’t use the first method of calculation because it can yield inaccurate results.

Cost of Goods Sold (COGS) divided by Average Inventory.

There are usually 2 ways you can calculate the rate of your inventory turnover: Here’s how to calculate your inventory turnover rate: How do You Calculate the Rate of Inventory Turnover? It can also tell you how well your inventory is being managed, and whether or not it’s being mismanaged. It signals to your company’s managers and executives – along with your company’s investors – how well you’ve been converting your inventory into sales. The rate of inventory turnover is a measurement of the number of times your inventory is sold or used in a given time period, usually per year. By the end, you’ll know what your rate of inventory turnover means and how to use that knowledge to increase the efficiency and profitability of your business. In this article, we’ll explore what inventory turnover is and how to calculate it before discussing a few ways to improve it.

Your rate of inventory turnover is a key metric to understand if you want to optimize your cash flow, working capital, and inventory costs.īy calculating your rate of inventory turnover, you’ll have a better grasp on the market demand for your products, on the amount of obsolete stock you may be carrying, and what steps you need to take to sell or stock more inventory, depending on your turnover rate.

Calculate your rate of inventory turnover to maximize cash flow

Inventory turnover rate formula