Low inventory turnoverĪ rate of 1 or less means you have excess inventory. A ratio between 2 and 4 means that your inventory restocking matches your sale cycle you receive the new inventory before you need it and are able to move it relatively quickly. What is an ideal inventory turnover rate?įor most retailers, an inventory turnover ratio of 2 to 4 is ideal however, this can vary between industries, so make sure to research your specific industry. Once you know how to calculate inventory turnover ratio, the next step is understanding what a high turnover rate versus a low turnover rate means, and what the ideal inventory ratio is so you can create an action plan on how to improve the higher inventory turnover ratio. How to analyze inventory turnover ratioįully understanding inventory turnover can provide invaluable insight into how your ecommerce business manages costs, how sales initiatives are performing, and how you can further optimize inbound and outbound logistics workflows. If you sell 1,000 units over a year while having an average of 200 units on-hand at any given time during that year, your inventory turnover rate would be 5. Inventory turnover = number of units sold / average number of units on-hand You can also calculate your inventory turnover ratio by looking at units, rather than costs: Inventory turnover = COGS / Average Inventory Valueįor example, if your COGS was $200,000 in goods last year, and your average inventory value was $50,000, your inventory turnover ratio would be 4. Here’s the simple inventory turnover formula: Divide the cost of goods sold by your average inventory.Identify cost of goods sold (COGS) over the accounting period.To calculate inventory turnover, complete the following 3 steps: How to calculate inventory turnover ratio Understanding the average inventory turnover is a critical measure of business performance, cost management, and sales, is inversely proportional to days in sales inventory and can be benchmarked against other companies in a given industry. Inventory turnover is measured by a ratio that shows how many times inventory is sold and then replaced in a specific time period. Whether you store your products yourself or partner with a 3PL, understanding the data around your inventory and operations can help you reduce shipping costs, increase efficiency, and maximize cash flow. Using the sales value instead will give a misleading result, because the average inventory in the same formula is taken at cost value, and not at retail value.Managing inventory effectively and efficiently is vital to the success ecommerce brands. When you calculate the inventory turnover you do not use sales in the formula, but rather the COGS ( cost of goods sold). The beginning and ending inventory is taken at cost value. To calculate the average inventory use the below formulaĪverage Inventory = (Beginning Inventory + Ending Inventory ) ÷ 2 To calculate IT you will need the COGS for that period and the average inventory for the same period.Īverage inventory is used because typically the level of inventory varies throughout the year, depending on seasonality and events. Inventory Turnover (IT) = COGS ÷ Average Inventory It gives an idea about how efficiently a company is managing its inventory. Inventory turnover ratio (IT) measures how many times a company turns its inventory during a certain period of time.
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