HOW TO CALCULATE INVENTORY TURNOVER RATIO
Inventory turnover ratio helps you in evaluating HOW WELL THE MANAGEMENT IS WORKING in managing the inventory and generating sales from it
It is the measure of HOW QUICKLY YOUR BUSINESS SELLS through its inventory in a given period of time and needs to replace it again
Inventory turnover is a financial ratio which depends on
Cost of Goods Sold (COGS)
Average Inventory
CALCULATING THE FINANCIAL RATIO
Deciding the Inventory Turnover Period
1
The time period can range from one single day or an entire year or it can be a particular week. We cannot CALCULATE INVENTORY TURNOVER AT A PARTICULAR INSTANT
Calculating the Cost of Goods Sold( COGS)
2
Cost of goods sold is the direct total expense associated with the production of goods sold or the cost of the goods you ACQUIRE TO SELL TO THE CUSTOMERS
Finding Average inventory
3
Calculating average inventory is simple, add the starting INVENTORY AND ENDING INVENTORY TOGETHER Divide the sum by 2
Apply the Inventory Turnover Formula
4
APPLICATION AND INTERPRETATION OF INVENTORY TURNOVER IN YOUR BUSINESS
Using Inventory Turnover to Calculate Average Days to Sell a Product
1
Inventory turnover period in simple words is also known as the AVERAGE NUMBER OF DAYS REQUIRED TO SELL A PRODUCT
The Ideal Inventory Turnover Ratio
2
High inventory turnover indicates fast moving inventories and efficient operations
Low inventory turnover indicates that the company’s goods are spending a lot of time being stored in the warehouse
Consider Ideal Turnover According to the Product Type
3
Items with high turnover are good because there are MANY PRODUCTS THAT TEND TO EXPIRE SOON or get out of season quickly
Very High Inventory Turnover is Also not Good
4
Usually HIGH INVENTORY TURNOVER INDICATES HIGH SALES. But at times that is not true, especially for non-perishable goods
CONCLUSION As per the product, you need to keep inventory turnover in check so as to match demand and supply. Optimal Inventory Turnover Ratio varies from company to company and thus cannot be generalized
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