How to Calculate Inventory Turnover Rate: Steps & Formula

For example, inventory is one of the biggest assets that retailers report. If a retail company reports a low inventory turnover ratio, the inventory may be obsolete for the company, resulting in lost sales and additional holding costs. In general, though, a higher inventory turnover ratio is better than a lower one.

If your company sells products with a long shelf life, you might not want to sell them too quickly. Inventory turnover can be easily and quickly calculated using Microsoft Excel. For example, let’s compare the inventory turnover ratios for Ford (F) and General Motors (GM) using Excel. Simply put, the higher the inventory ratio, the more efficiently the company maintains its inventory.

reasons a company may be improving its inventory turnover

The second is more accurate, but it requires a few more details to calculate. Personal FICO credit scores and other credit scores are used to represent the creditworthiness of a person and may be one indicator to the credit or financing type you are eligible for. Nav uses the Vantage 3.0 credit score to determine which credit offers are recommended which may differ from the credit score used by lenders and service providers. However, credit score alone does not guarantee or imply approval for any credit card, financing, or service offer. This short-term financing can be easier to qualify for but some options may carry higher costs so choose wisely.

There are quite a few KPIs that managers use to evaluate their inventories to keep them under control. One of the most widely used, although not so trivial to assess, is the Inventory Turnover index. It is, roughly speaking, an indicator that tells you how many times, which of the following factors are used in calculating a companys inventory turnover? during a year, your inventory is completely replaced. Take advantage of a free 7-day trial to start optimizing your inventory management today. It’s often smart to run both of these formulas to get a clearer idea of how efficiently you’re running your business.

Sales & Investments Calculators

A higher inventory is usually better, though there may be downsides to a high turnover. Inventory turnover is a financial ratio showing how many times a company turned over its inventory relative to its cost of goods sold (COGS) in a given period. A company can then divide the days in the period, typically a fiscal year, by the inventory turnover ratio to calculate how many days it takes, on average, to sell its inventory.

• Taking this analysis a step further, we could better assess Ford and General Motors’ respective inventory turnover by looking at historical numbers.
• The ratio can show us the number of times and inventory has been sold over a particular period, e.g., 12 months.
• Inventory management helps businesses make informed decisions about how much inventory they need to keep on hand and how quickly they should replace it.
• It’s a good idea to calculate your inventory turnover rate regularly to keep track of your company’s performance.