Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing and purchasing new inventory.
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Inventory turns measures the number of times inventory is sold or used in a strictly defined time period. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.
The result displays the ratio showing how many times a company’s inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the number of days it takes to sell the inventory on hand or “inventory turnover days.”
There are two basic formulas: dividing sales by inventory, or dividing cost of goods sold by average inventory.
The former calculation is used more often but the COGS (cost of goods sold) includes another valuable tool: it uses sales recorded at market value, while inventories are usually recorded at cost. Using average inventory rather than the ending inventory level helps minimize seasonal factors.
The ratio is not of much use if not compared against industry averages. According to basic rules, low turnover shows poor sales that result in excess inventory. On the other hand, high ratios indicate either strong sales or ineffective buying.
High inventory levels represent an investment with a zero rate of return. Should prices fall, it could spell issues for the company.
Inventory turns are a popular measurement used in inventory management to assess operational and supply chain efficiency. Also referred to as inventory turnover and inventory turnover ratio, the inventory turns ratio is calculated by dividing the annual cost of goods sold (COGS) by the amount of average inventory.
company is managing inventory and generating sales from that inventory. Inventory turns are an especially important measurement for retailers and companies that sell physical goods. Reducing inventory holdings can lead to reduced overhead costs and improved enterprise profitability.
The calculation for inventory turns for finished goods, literally, how often inventory "turns over" is as follows:
Cost of goods sold (COGS) ÷ average inventory (beginning inventory + ending inventory)/2