![]() By analyzing the data, you can investigate any unexpected values and uncover potential inventory problems. However, you need to recalculate this periodically to make real use of this information. It provides insight into how well a company sells its products and manages its inventory. Use the following formula to calculate the number of days it takes to use up the inventory: average days to sell inventory = 365 / inventory turnover ratio How to Calculate Inventory Turnover in Excel or Google Sheets?Īs you can see, inventory turnover is a useful financial ratio. ![]() You can also quickly convert this to obtain the number of days a turn takes. Where average inventory = (beginning inventory - end inventory) / 2 inventory turnover ratio = COGS / average inventory You can use the following formula to calculate inventory turns for a given period of time. You can use whatever timeframe you prefer, but it’s common to use yearly, quarterly, or monthly data. The average inventory can be calculated by adding the beginning and end inventories for the period and dividing by 2. To calculate the inventory turnover ratio, divide the cost of goods sold (COGS) for a given period by the average inventory for that same period. For example, the finance and service sectors have the highest averages for inventory turnover. If you work with intangibles, inventory turnover can be exceptionally high. However, the values themselves change drastically depending on various factors. Generally speaking, higher values are preferred by all interested parties. However, what “high” and “low” means will vary significantly by industry and business model. A low ratio can indicate low sales or overstocking. However, too high a value could indicate a higher likelihood of stock shortages. What is a Good Inventory Turnover Ratio?Ī high ratio indicates that your products sell well since inventory is used quickly. Values calculated using net sales can be significantly and misleadingly higher. When comparing ratio values, remember to check whether they were calculated using the same method. ![]() However, the latter is usually preferred, as using the value for COGS provides a more accurate result. There are different methods available to find the inventory turnover ratio, using net sales or cost of goods sold (COGS). This value can also be recalculated so that it is expressed in days. The inventory turnover ratio indicates how many times inventory was replenished during a specific timeframe. Indicates how many days it takes on average to sell the company’s inventory.Inventory turnover shows how quickly a company uses its inventory. What is the Average Sales Period?Īverage sale period = 365 days/Inventory turnover ratio The average inventory is calculated by adding the beginning inventory to the ending inventory and divide by 2 (beginning inventory + ending inventory)/2. Inventory turnover can also be calculated as sales divided by average inventory. The cost of goods sold (COGS) can be divided by the average inventory. There are multiple ways to calculate the inventory turnover of a company. An inventory turnover ratio helps companies make sales and production decisions that will further enhance profitability and customers satisfaction.īack to: Accounting & Taxation How to calculate Inventory Turnover? This metric is calculated by dividing the number of goods or cost of goods sold by the average inventory. Inventory Turnover Ratio = COGS / Average Inventory Inventory turnover, also known as Sales Turnover, is a metric representing the rate at which a company sells its inventory and replaces it in a given period. Update Table of Contents What is Inventory Turnover? How to calculate Inventory Turnover? What is the Average Sales Period? What is the Inventory Turnover Ratio?
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