How to calculate the inventory turnover ratio?

To determine the inventory turnover ratio, you need to consider two key data points. These metrics are typically readily available through your company's income statement, balance sheet, or customer relationship management (CRM) software.

Cost of Goods Sold: This figure represents the direct cost of inventory sold by your company. It is crucial for assessing profitability and encompasses expenses related to inventory storage and maintenance. It should not be confused with the amount paid to suppliers. The cost of goods sold also includes storage fees, packaging costs, and any additional labor involved in selling the products.

Average Inventory: This value provides an estimate of the average inventory value over a specific period. It helps your company gauge the quantity of stock it holds. To calculate the average inventory for a one-month period, simply add the cost of your initial inventory at the beginning of the month to the cost of your inventory at the end of the month, and then divide the total by two.

To calculate the inventory turnover ratio, divide the cost of goods sold by the average inventory. This calculation can be performed for a specific product (SKU) or for your entire inventory, depending on the desired information. The resulting number represents how many times your inventory has been sold and replenished during the given period.

Once you have calculated the inventory turnover ratio, it is important to assess whether it falls within a favorable range. This assessment depends on your industry and your company's objectives. For instance, in the e-commerce sector, an ideal inventory turnover ratio generally ranges between 4 and 6 on an annual basis. In a high-volume, low-profit-margin business like the sale of women's yoga pants, the monthly or annual turnover ratio is likely to be significantly higher than in a low-volume, high-profit-margin business, such as selling airplane engines for recreational aircraft.