Inventory turnover, or simply inventory turns, is a measure of how quickly inventory is moving through a company. In other words, it tells you how many times, on average, your inventory is sold and replaced over the course of a year.
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A high inventory turnover ratio is generally seen as a good thing, since it means that your inventory is selling quickly and you’re not tying up too much money in unsold goods. Conversely, a low inventory turnover ratio may be a sign that your inventory is not selling as quickly as it should be, and you may want to take steps to improve your sales.
In this article, we’ll give you a step-by-step guide for how to calculate inventory turnover, along with some examples to illustrate the concept.
How to Calculate Inventory Turnover
There are two main ways to calculate inventory turnover:
Inventory turnover = Cost of goods sold (COGS) / Average inventory
Inventory turnover = Number of units sold / Average inventory
The first method, which uses COGS, is the more commonly used of the two. However, the second method, which uses units sold, may be more accurate in some cases (we’ll discuss this in more detail later).
Here’s a closer look at each method:
Method 1: COGS
To calculate inventory turnover using COGS, you’ll need two pieces of information:
Your company’s cost of goods sold for a given period of time
Your company’s average inventory for the same period of time
COGS is typically reported on a company’s income statement. If it’s not, you can calculate it using the following formula:
Once you have your COGS, you can calculate inventory turnover by dividing it by average inventory. Average inventory is simply the average level of inventory that your company has on hand over the course of a year. You can calculate it using the following formula:
Average inventory = (Beginning inventory + Ending inventory) / 2
Here’s an example of how to calculate inventory turnover using COGS:
Let’s say that your company’s cost of goods sold for the year is $1 million. Your beginning inventory for the year was $100,000, and your ending inventory for the year was $150,000. That means your average inventory for the year was $125,000.
Inventory turnover = $1 million / $125,000 = 8
That means that, on average, your inventory turned over 8 times during the year.
Method 2: Units Sold
To calculate inventory turnover using units sold, you’ll need two pieces of information:
The number of units your company sold during a given period of time
Your company’s average inventory for the same period of time
You can usually find the number of units your company sold on your company’s income statement. If it’s not reported there, you can calculate it using the following formula:
Units sold = Revenue / Average selling price
Once you have the number of units sold, you can calculate inventory turnover by dividing it by average inventory. As we mentioned earlier, average inventory is simply the average level of inventory that your company has on hand over the course of a year. You can calculate it using the following formula:
Average inventory = (Beginning inventory + Ending inventory) / 2
Here’s an example of how to calculate inventory turnover using units sold:
Let’s say that your company sold 10,000 units during the year. Your beginning inventory for the year was 1,000 units, and your ending inventory for the year was 2,000 units. That means your average inventory for the year was 1,500 units.
Inventory turnover = 10,000 units / 1,500 units = 6.7
That means that, on average, your inventory turned over 6.7 times during the year.
Which Method Should You Use?
As we mentioned earlier, the COGS method is the more commonly used method for calculating inventory turnover. However, in some cases, the units sold method may be more accurate.
This is because the COGS method does not take into account changes in the price of inventory, while the units sold method does. For example, let’s say that your company sold 10,000 units during the year,
