You’ll need the average inventory again for this formula.How you manage your inventory can make or break your business. The DSI is a measure of how many days it takes for your inventory to be sold. Inventory turnover ratio = Cost of goods sold / average inventory It is usually listed on your income statement. To calculate the inventory turnover ratio, start by finding the average inventory and the cost of goods sold (COGS), which is a measure of how much it takes to produce your goods including materials and labor. Benchmark your business against peer company ratios to see how you’re performing. But it can also be an indicator of lost sales if you’re not holding onto enough inventory to meet demand. ![]() A higher turnover ratio means you’re replacing your inventory and moving product. It also shows if you’re holding onto too much stock. The inventory turnover ratio is a way to look at how much time passes between when you buy inventory and when the final product is sold to your customers. This is done with the inventory turnover ratio and the days sales of inventory (DSI). The average inventory is also a key component of understanding how quickly you’re able to turn inventory into sales. How much inventory will you need to support the sales to fund the bottom line? The average inventory can help by giving you the overview for a given period. When negotiating with suppliers and making strategic decisions about how much stock to order, you need to have a good grasp on the big picture. Looking at a single point in time won’t necessarily give you an accurate picture of your inventory. Or maybe your business is seasonal-like ice cream in the summer or holiday decorations in winter. Or you might be stocking up for a specific sale. You might get a massive delivery at the end of the month. You could perform the same exercise for any given period-year-to-date, a quarter or even a month. This will show you how much inventory each month on average you needed to supply and support that amount of sales. Take the revenue from your last fiscal year and compare it to your average inventory from the same time. Here’s one way to use average inventory for a comparison. ![]() Average inventory figures for other stretches of time are similarly calculated. Remember to also include the base month in fiscal year average inventory calculations which also means you would divide that sum by 13 months rather than 12. ![]() To calculate the average inventory over a year, add the inventory counts at the end of each month and then divide that by the number of months. For example, in tracking inventory losses due to shrinkage, damage and theft by comparing average inventory to overall sales volume in the same period.Īverage inventory is a calculation of inventory items averaged over two or more accounting periods.
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