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Inventory Turns Formula:
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Inventory turns, also known as inventory turnover, measures how many times a company's inventory is sold and replaced over a period. It indicates the efficiency of inventory management and how quickly goods are moving through the supply chain.
The calculator uses the inventory turns formula:
Where:
Explanation: This ratio shows how efficiently a company is managing its inventory by comparing the cost of goods sold to the average inventory level maintained.
Details: Inventory turnover is a critical metric for assessing operational efficiency, identifying slow-moving inventory, optimizing cash flow, and improving profitability through better inventory management.
Tips: Enter COGS and average inventory values in dollars. Both values must be positive numbers. Average inventory is typically calculated as (Beginning Inventory + Ending Inventory) ÷ 2.
Q1: What is a good inventory turnover ratio?
A: Ideal ratios vary by industry, but generally higher is better. Retail typically aims for 4-6 turns, while manufacturing may be 8-12 turns annually.
Q2: How do I calculate average inventory?
A: Average inventory = (Beginning inventory + Ending inventory) ÷ 2. Use values from the same accounting period as COGS.
Q3: What does low inventory turnover indicate?
A: Low turnover may suggest overstocking, poor sales, or obsolete inventory, which ties up capital and increases storage costs.
Q4: Can inventory turnover be too high?
A: Extremely high turnover might indicate insufficient inventory levels, potentially leading to stockouts and lost sales opportunities.
Q5: How often should I calculate inventory turns?
A: Most businesses calculate it quarterly or annually, but monitoring it monthly can help identify trends and issues early.