To work out inventory turnover ratio, you’ll first need to calculate COGS (cost of goods sold) over the period you want to cover.ĬOGS is defined as the costs associated with sourcing and fulfilling your goods, including the cost of raw materials, shipping costs, storage costs, labour costs, and more.
AVERAGE INVENTORY FORMULA RETAIL HOW TO
How to calculate inventory turnover ratio It’s something your customers are bound to notice too, as understanding inventory turnover means you can better avoid stockouts and backorders, and create a better customer experience. With a good understanding of inventory turnover, you can make much better decisions around budgets, forecasting demand, and supply chain management. The inventory turnover ratio is a vital calculation to evaluate business health and improve key processes in sales, inventory management, financial planning, and more.
The importance of inventory turnover ratio Inventory turnover is calculated through a ratio that shows how many times inventory has been sold and replaced over a specific period of time.Įssentially, it’s a measurement of how fast a company sells their stock, with high inventory turnover generally pointing towards a thriving business, with low inventory turnover usually, but not always, indicating a struggling business.
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