Inventory turnover is a ratio of how much money a company makes every time they clear their "shelves". The inventory turnover also says how fast a company sells its products and refills their displays. In calculating the inventory turnover, you are calculating for the inventory turnover ratio.
Below are the easy steps showing you how to calculate the inventory turnover for the inventory turnover ratio.
- Get the total cost of the goods sold. In calculating the inventory turnover, you need the cost of goods already sold and the value of the inventory on hand. You can calculate the cost of the goods already sold by taking the value of one item in the inventory, writing down how much it was sold for, then multiplying it by how many of the same item at the same cost was sold. For instance, if a company sold 700 jars of peanut butter, and 1 jar of peanut butter costs $2.99, multiply $2.99 by 700. We then get $2,093.00. This is the total cost of goods sold.
- Get the value of the inventory on hand. The inventory on hand is the items that are still in stock. You can get the value of on-hand inventory by writing down the value of one of the items that are still in possession of the company, and multiplying it by how many are still in the company's storage. For instance, if the same company that sells peanut butter has 500 jars waiting to hit the shelves, and one jar sells for $2.99, multiply $2.99 by 500. The resulting value, $1,495.00, is the value of the inventory on hand.
- Divide. Divide the total cost of the goods sold and the value of the inventory on hand. In the example above, the total cost of goods is $2,093.00 while the value of the inventory on hand is $1,495.00. Divide $2,093.00, the total cost of goods sold, by the value of the inventory on hand, $1,495. The result is 1.4, which is the inventory turnover or inventory turnover ratio.
Inventory turnover is the ratio that determines the number of times a company sells a set of products and replaces them. The inventory turnover ratio is also an indicator of how efficient a company is at emptying and refilling their shelves or displays. Using the steps listed above, you can calculate the inventory turnover ratio of any company, if you know the total cost of the goods the company sold and the value of the inventory the company has in their stock room.
Inventory turnover is a good indicator of how well a product is selling. If the inventory turnover is a high number, it means the product "flies off the shelf" and that many people who enter the store or the display room for that product likes the product and therefore buys it. A high inventory turnover ratio is not always a good sign of business, however, as there might be limited supplies of the item. Supplies should always meet the demand. If it is your company you did inventory turnover for, make sure that you keep up with the demand of the product indicated by a high inventory turnover ratio.