The article helps you understand the inventory turnover ratio formula elements, benefitting you and your business. Therefore, let’s dig deeper and learn about the inventory turnover formula!
Quite a few times, items fly off the shelf very quickly. However, you can’t get enough discounts now and then. Usually, when a product drifts in the middle of somewhere, companies need to know about its happenings. This is where the inventory turnover formula comes in and tells business owners about everything from pricing strategy, supplier relationships, etc.
The inventory turnover ratio formula is merely a financial formula telling you how a business has sold and replaced an inventory during a given period of time. A business can then split the days in the period by the inventory turnover ratio formula and calculate the days it requires to sell the inventory on hand.
Calculating the sales to inventory ratio formula helps businesses make better and informed decisions. It impacts pricing, manufacturing, marketing, and buying new stock decisions.
The inventory turnover formula is calculated when you divide COGS by the average value of inventory, where COGS means the cost of goods sold.
The other two ways that businesses use to calculate the inventory turnover ratio formula listed as follows are:
As mentioned above, you can calculate it with two formulas. One requires COGS and the other uses sales. An expert uses the COGS formula to calculate inventory rather than sales to achieve higher accuracy, as sales include a markup over cost. When you divide sales by average inventory, it expands inventory turnover.
In both cases, average inventory is used to help eradicate seasonality effects.
For instance, a company XYZ obtains 1 million in sales and 250,000 dollars in COGS.
The average inventory cost is $25,000. When we put this information together, we can calculate that inventory turnover
In simpler words, this company tends to turn over by 40 times in a year.
With one step forward, when you divide 365 days by the inventory turnover, it tells how many days a company requires to sell its stock products on average
In our inventory turnover formula example, it’s 9.1.
As an alternative, when we divide COGS by average inventory
the average inventory turnover is around 10.
Or, when $250,000 (COGS) is divided by $25,000 (inventory)
it is 36.5 days under this method.
The inventory turnover formula tells you how fast your business can sell in-stock products. A low inventory presents weak sales and excess in-stock items possibly. This is also known as overstocking. Further, this shows that a problem is present with the goods offered at a sale and might result from less marketing.
On the other hand, a high ratio represents another picture. It tells that inventory is insufficient now because of high sales. The former situation turns out to be desirable while the latter situation is problematic.
The speed at which a company sells its products or inventory is an essential measure. This calculates the performance of a business. Business owners that move inventory fast are more likely to outperform.
Moreover, the longer an item is held, the higher its cost. There will be fewer reasons for consumers to return and shop for new products.
This is seen in brands such as Zara and H&M. They are examples of the fast-fashion business. Such business typically limits runs and exchanges depleted inventory rapidly with new stock. A slow-selling product equals to higher holding cost when compared to a fast-selling inventory.
The slow turnover in inventory indicates less market demand for specific products. It helps companies decide prices, offer incentives to deplete inventory faster, and change the mix of goods delivered in sale for the future.
For a business, all of these are significant decisions to make. For a company that strives to be healthy and competitive, it requires keeping its item mix aligned with customer demand. A fast turn tells that a company purchasing strategy isn’t aligned correctly with the market demand. Moreover, it might be experiencing delays somewhere in the supply chain process, or maybe a specific product is seeing a rise and demand.
The inventory turnover day’s calculator relates to a financial efficiency ratio calculator. It includes an inventory turnover formula and inventory day’s formula to help you understand how fast a company sells its products in a specific time.
Besides the inventory turnover formula, a retailer must also be familiar with the profit percentage formula. It is because it tells you how much profit one has gained by selling a particular inventory. You can learn how to calculate profit percentage with this formula mentioned below:
Profit formula: Selling price – Cost price
How to find Profit percentage: (Profit /Cost price)x100
The above formulas are used for significant financial transactions in a business.
Other than this, you must be aware of the selling price formula too, mentioned as follows:
Selling price formula = Cost price + profit.
The above formula is essential.
How to calculate profit margin = (Revenue-cost)/revenue
This formula tells you about the degree a company makes money efficiently. It indicates how many cents of profit has been produced for each sale dollar.