Inventory turnover

In accounting, the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. Inventory turnover is also known as inventory turns, merchandise turnover, stockturn, stock turns, turns, and stock turnover.

Formulas

The formula for inventory turnover:

Inventory Turnover

=

Net Sales

Average Inventory at Selling Price

{\displaystyle {\text{Inventory Turnover}}={\frac {\text{Net Sales}}{\text{Average Inventory at Selling Price}}}}

or

Inventory Turnover

=

Cost of Goods Sold

Average Inventory at Cost

{\displaystyle {\text{Inventory Turnover}}={\frac {\text{Cost of Goods Sold}}{\text{Average Inventory at Cost}}}}

or

Inventory Turnover = ⁠Cost of Material − Change in inventories (of 1/2 and 1/1 goods)/Inventories⁠

The most basic formula for average inventory:

Average Inventory

=

Beginning inventory

+

Ending inventory

2

{\displaystyle {\text{Average Inventory}}={\frac {{\text{Beginning inventory}}+{\text{Ending inventory}}}{\text{2}}}}

or just

Average Inventory

=

Ending inventory

{\displaystyle {\text{Average Inventory}}={\text{Ending inventory}}}

Multiple data points, for example, the average of the monthly averages, will provide a much more representative turn figure.

The average days to sell the inventory is calculated as follows:

Average days to sell the inventory

=

365 days

Inventory Turnover Ratio

{\displaystyle {\text{Average days to sell the inventory}}={\frac {\text{365 days}}{\text{Inventory Turnover Ratio}}}}

Application in business

A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages. Another insight provided by the inventory turnover ratio is that if inventory is turning over slowly, then the warehousing cost attributable to each unit will be higher.

Conversely a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low. This often can result in stock shortages.