Take the example of a vintage auto seller or a luxury jewelry store. Not only do these items incur storage costs, they also tie up business funds in the form of unsold inventory and risk degrading in quality or falling out of favor with consumers.īut low inventory turnover isn’t always a negative sign. Low inventory turnover generally results from items sitting in inventory for longer than is expected or desirable. Low inventory turnover ratiosĬonversely, low inventory turnover ratios may be cause for concern in some scenarios. If these factors result in inventory shortages, lower sales can potentially follow in the future. However, inventory turnover ratios can also be driven artificially high by unsustainable sales or ineffective buying. When inventory turnover is high, storage and warehousing costs are reduced, as companies don’t have to pay to store slow-moving products. Retailers of low-margin goods also typically need to maintain high inventory turnover rates to remain profitable. High inventory turnover ratiosīroadly speaking, a higher inventory turnover ratio is almost always better-especially for retailers of perishable goods, such as grocery stores, convenience stores, and florists. That said, even as you look at industry benchmark figures, what’s more important is understanding how inventory turnover factors into the bigger picture of your business’s finances. Expressed this way, inventory turns over every 73 days, or five times total in a year. Continuing with the earlier example, an inventory turnover ratio of 5 becomes 73 inventory turnover days (365 / 5 = 73). To convert your inventory turnover ratio to inventory turnover days, divide 365 by your ratio. ReadyRatios is a good source of benchmarks by industry, though the site expresses inventory turns in days, rather than ratios. Industry benchmarks for inventory turnover vary, but most suggest that a ratio of 4-10 is healthy for ecommerce businesses. What is a good ratio for inventory turnover? In essence, you sold through and replaced your inventory five times over the past year. Then, you’ll use your balance sheet to find the average value of your inventory account over the past year-imagine that’s $40,000.ĭividing your COGS ($200,000) by your average inventory ($40,000) produces an inventory turnover ratio of 5:ĬOGS ($200,000) / Average Inventory ($40,000) = 5 First, you’ll look at last year’s income statement to find your total COGS-let’s say they totalled $200,000. Imagine that you want to calculate your retail business’s inventory turnover last year. Here’s an example to see how to calculate inventory turnover ratio values in practice. Measuring COGS instead of market value takes the potential impact of market fluctuations on pricing out of the equation, while using average inventory instead of ending inventory can better account for seasonal variation in purchase patterns. Inventory Turnover = Cost of Goods Sold (COGS) / Average Inventory How do you calculate inventory turnover ratios?Īlthough inventory turnover can be measured by dividing the market value of a company’s sales by its ending inventory figure, supply chain professionals generally prefer to calculate inventory turnover as follows: Also called ‘inventory turns,’ inventory turnover is typically measured as a rate or ratio that gives a business insight into import, manufacturing, purchasing, and pricing decisions. Simply put, inventory turnover is a measurement of how frequently a company sells and replaces its inventory within a given period. Here, we’ll take a closer look at what inventory turnover is, how to calculate inventory turnover ratio, examples, and how to interpret your results in the context of your unique business. So what is inventory turnover? How do you calculate inventory turnover, and what other factors-like the type of goods you sell or your return solution-affect your rate? There’s no shortage of KPIs that can be tracked when it comes to ecommerce, but inventory turnover is one that most retailers pay close attention to.
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