![]() ![]() (Average inventory / cost of goods sold) x 365 How to Calculate Inventory Turnover Ratio (ITR)?Ĭompanies can calculate inventory turnover. Days sales of inventory (DSI) it is calculated like this for a daily context: Lastly, the formula can also be used to calculate how much time it will take to sell all the inventory currently on hand. However, turnover ratio may also be calculated using ending inventory numbers for the same period that the cost of goods sold (COGS) number is taken. Average inventory thus renders a more stable and reliable measure.įor example, in the case of seasonal sales, inventories of certain items - like patio furniture or artificial trees - are pushed abnormally high just ahead of the season and are seriously depleted at the end of it. How Inventory Turnover Ratio WorksĪverage inventory is typically used to even out spikes and dips from outlier changes represented in one segment of time, such as a day or month. number of KPIs that can provide insights into how to increase sales or improve the marketability of certain stock or the overall inventory mix. ![]() Ultimately, the inventory turnover ratio measures how well the company generates sales from its stock. Inventory Turnover Ratio ExplainedĬalculating and tracking inventory turnover helps businesses make smarter decisions in a variety of areas, including pricing, manufacturing, marketing, purchasing and warehouse management. Knowing your turnover ratio depends on effective inventory control, also known as stock control, where the company has good insight into what it has on hand. A higher ratio is more desirable than a low one as a high ratio tends to point to strong sales. ![]() The turnover ratio is derived from a mathematical calculation, where the cost of goods sold is divided by the average inventory for the same period. The formula can also be used to calculate the number of days it will take to sell the inventory on hand. The inventory turnover ratio is the number of times a company has sold and replenished its inventory over a specific amount of time. Conversely, a higher ratio can indicate insufficient inventory on hand, and a lower one can indicate too much inventory in stock.
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