Keen on improving her inventory management, Sarah uses the Inventory Turnover Calculator to assess her past year’s performance. Furthermore, an extremely high ratio can be a bad omen for your business. For starters, it can be indicative of underlying understocking problems. It could also mean your prices are too cheap, and this might lead to heavy business losses.

Mortgage Calculators

Measuring how fast you sell through your inventory is a key measurement of inventory management performance. This metric goes by several names, so don’t worry if you hear multiple references. Most businesses aim to have an inventory ratio between five and ten. That helps balance the need to have items in stock while not reordering too often. The Inventory Turnover Calculator can be employed to calculate the ratio of inventory Payroll Taxes turnover, which is a measure of a company’s success in converting inventory to sales.

Weeks of Supply (WOS)

• When you strategically manage your inventory, you can gain more market share and improve your industry ranking.
• The primary users of this tool include inventory managers, financial analysts, and business owners who seek to improve the liquidity and profitability of their operations.
• While the inventory turnover formula is a useful metric for assessing inventory efficiency, it should not be used in isolation.
• A high turnover ratio usually indicates good sales and efficient inventory management, whereas a low ratio could signal overstocking or slow-moving goods.
• Striking the right balance will help you maintain optimal inventory levels and enhance inventory turnover.
• It’s a handy financial metric that helps companies avoid inefficient inventory management practices that lead to excessive inventory and unsold stock.
• It’s vital—and not always easy—for retailers to understand what inventory is moving and how quickly.

This business takes 91 days to replenish inventory, which could lead to high holding costs if stock is not moving efficiently. Since the inventory turnover ratio represents the number of times that a company clears out its entire inventory balance across a defined period, higher turnover ratios are preferred. First, you should adjust your inventory acquisition rates to better meet customer demand. That means reducing acquisition if your inventory turnover ratio is too low and increasing it if your ratio is too high. If customer demand is historically variable for your business, you can leverage demand forecasting tools to get a better idea of how to fine-tune your inventory management.

Related calculators

Efficient supplier management can lead to faster restocking and improved inventory turnover. These factors, which are out of the retailer’s control, can impact inventory turnover ratios. Inventory turnover ratios can vary widely across different industries, so it’s important to understand what’s typical for your sector. For example, retailers in fast-moving industries like fast fashion often have high inventory turnover ratios because they clear out stock quickly to keep up with trends and customer demand. In contrast, businesses dealing in specialized or luxury products, such as high-end automobiles or custom equipment, usually have lower turnover ratios due to longer sales cycles.

• If you’re constantly running out of stock, you might be turning products too quickly — and missing sales in the process.
• Before starting to review the inventory turnover formula, we need to consider the period of the analysis.
• Look at turnover one SKU at a time to see what is and isn’t working.
• This allows for targeted strategies to strengthen sales and inventory efficiency in each category.
• A high inventory turnover generally means that goods are sold faster, and a low turnover rate indicates weak sales and excess inventories, which may be challenging for a business.
• So, the number of inventory turns tells us how many times we sold through our inventory in a given period of time.
• Monitoring the company’s inventory turnover ratio helps identify trends in sales inventory and operational performance.

By understanding how to calculate and interpret both the inventory turnover ratio and rate, you can make informed decisions that enhance efficiency and lessen costs. Start tracking your inventory metrics today and watch your business thrive. The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory balance for the matching period. Inventory turnover is a simple equation that takes the COGS and divides it by the average inventory value. This ratio tells you a lot about the company’s efficiency and how it manages its inventory. Companies should look for a higher inventory turnover ratio that balances having enough inventory in stock while replenishing it often.

On the other hand, the average inventory is the trial balance median value of the beginning and ending stock over a given period. A high inventory ratio indicates you are selling stock fast, and vice versa. Improve turnover by optimizing order quantities, implementing just-in-time inventory, forecasting demand accurately, and adjusting pricing strategies. When you integrate an enterprise resource planning (ERP) system with your WMS, you can better maximize supply chain operations, manage SKUs, and automate purchase orders, among other functions. Outsourcing logistics, storage and distribution to a third-party logistics (3PL) streamlines operations, reduces overhead costs and enhances delivery times.