Inventory Turnover Calculator
What is Inventory Turnover?
Inventory turnover is an efficiency ratio that measures how many times a company has sold and replaced its inventory during a specific period. It is a critical metric for retailers, manufacturers, and wholesalers to understand how effectively they are managing their stock and generating sales from their investment in goods.
The Inventory Turnover Formula
To calculate the inventory turnover ratio, you need two primary figures from your financial statements: the Cost of Goods Sold (COGS) from the income statement and the average inventory from the balance sheet.
Where Average Inventory is calculated as:
How to Calculate Inventory Turnover: Step-by-Step
- Identify COGS: Find the total Cost of Goods Sold for the period (usually a year or a quarter).
- Calculate Average Inventory: Add the value of inventory at the start of the period to the value at the end of the period, then divide by two.
- Divide: Divide the COGS by the Average Inventory.
- Calculate Days: To see how many days it takes to turn over inventory, divide 365 by your turnover ratio.
Example Calculation
Imagine a boutique clothing store has a COGS of $200,000 for the year. At the start of the year, they had $40,000 worth of clothes, and at the end, they had $60,000.
- Average Inventory = ($40,000 + $60,000) / 2 = $50,000
- Turnover Ratio = $200,000 / $50,000 = 4.0
- DSI = 365 / 4 = 91.25 days
This means the store sells through its entire inventory roughly 4 times per year, or every 91 days.
Why Inventory Turnover Matters
A high inventory turnover ratio generally indicates strong sales and effective inventory management. However, if it's too high, it might mean the business is missing out on sales because items are out of stock. Conversely, a low turnover ratio suggests overstocking, obsolescence, or deficiencies in the product line or marketing efforts.