how to calculate inventory turnover
How to calculate inventory turnover?
Answer:
Inventory turnover is a key financial ratio that indicates how many times a company has sold and replaced inventory during a specific period. It is important for assessing the efficiency of inventory management. The formula to calculate inventory turnover is:
Inventory\ Turnover = \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory}
Where:
- Cost of Goods Sold (COGS): This can be found on the income statement and represents the direct costs associated with producing goods.
- Average Inventory: This is calculated by adding the beginning inventory to the ending inventory and dividing by 2.
Once you have these values, plug them into the formula to calculate the inventory turnover. A high inventory turnover ratio indicates that a company is selling goods quickly, while a low ratio may indicate overstocking or inefficient sales. Understanding and monitoring this ratio can help businesses make better decisions regarding their inventory levels and sales strategies.