Let’s say a business’s cost of goods sold over a year is $100,000. Divide your COGS by your average inventory.Calculate your average inventory value by adding your beginning inventory and ending inventory balances for a single month, and dividing by two.Get your cost of goods sold (COGS) from your chart of accounts or find out how to manually calculate your COGS.There are three steps to calculating your inventory turnover ratio: How to calculate inventory turnover ratio For instance, low inventory turnover might not be a big cause for concern if it’s cheaper to order popular stock in bulk, or your business tends to have seasonal dips throughout the year. Excess inventory also ties up cash, which can have a negative impact on your cash flow. Low inventory turnover is usually not ideal because products can deteriorate the longer they’re stored while incurring holding costs at the same time. On the flipside, a low inventory turnover ratio could indicate: That said, in some cases, a high inventory ratio can mean not enough stock is on hand, which could signal supply chain issues, lost sales, or poor customer experience – so it’s important to understand the context for your business. selling stock quickly) also reduces the risk of products being unsellable due to spoilage or becoming obsolete. Maintaining a high inventory turnover ratio (i.e. Cash isn’t unnecessarily tied up in holding inventory.There is a healthy demand for your products.They “purchased” it at point of use in WIP, and immediately shipped the finished goods… so (in my view) their “turns” was phony.Tracking inventory turnover can help you make more informed decisions about purchasing, pricing, manufacturing, marketing, and warehouse management.Īs a general rule of thumb, a high turnover ratio is good because it means inventory is being sold quickly. ![]() ![]() They manufactured Pool Pumps… OH… did I mention that the “Inventory” was supplier managed? So… their “Inventory” was not really ever inventory. I once had a customer who bragged about their inventory turns of 220 (basically daily turns), but then I saw their Inventory of purchased motors. (which is typically hidden in a pure Inventory report.) Also, in an MTO world, you have to be careful because inventory “Should” include WIP value. if you ignore total inventory of raw materials, and look only at the finished goods, their turns would be incredibly high (good) becuase nothing is ever in stock. I can see how Distribution companies would/could have a different measurement than manufacturing companies… But, I know of multiple manufacturing companies where they have a small number of finished goods parts that actually ship (fixed asset companies) but MANY raw materials that make up their inventory. this 4th example is fairly easy to do with a BAQ… calculating for a year would take a more more complicated, and in reality needs to have a table (executive query table?) that captures the month end inventory numbers each month, so that you could get the “average monthly value of inventory”. ![]() So… if you always build up inventory to the same value as you sell each month, then you will have 12 turns, because you build the inventory, then sell it.īut, if at the end of each month, you always have enough inventory to sell for one year, then you only have one turn.īelow is a screenshot of attached spreadsheet that you can use to do some playing… the first three tables show various examples of 12 turns, 1 turn, and 144 turns… the 4th table shows how you can theoretically calculate turns using only one months worth of data… you can do this by taking COGS for the month, Multiplying by 12 (to extrapolate Yearly turns) and then dividing that by the month end inventory. ![]() Here is the way that I have always understood Turns… it is the Number of times that you turn over inventory during a set period.
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