How To Calculate Inventory Turnover Ratio
If you’re a warehouse manager, supply chain manager or even an accountant manager finding the value of your company’s inventory turnover ratio is really important. Inventory turnover ratio is the amount of time you have ran through your inventory in a given time period.
So if you sold 10,000 of a certain product throughout an entire year. And you have an inventory turnover ratio of 4.0 this means that every quarter you have sold approximately 2,500 items. That leads to you selling 10,000 in an entire year.
Another example is that if you start off with 10,000 stocks in inventory and your inventory ratio is 8.0, at the of the year. You have run through your inventory 8 times throughout the year and you have sold 80,000 items.
There a lot of benefits of why this is so important. It will help you to get materials and supplies at lower price. So it gives you leverage in your negotiation, for example suppose that at the start of the year. You have predicted that you are going to sell 100,000 items based off of last year’s data and your market analysis.
You can then negotiate with your supplier to buy goods in bulk at a cheaper cost. This will further assist you in saving cost as well. It can also help you to save cost by buying a certain amount of items in a period. When you know the market is going to slow down a bit.
This will also prevent you from over loading your inventory with items that can be spoiled easily in a certain time frame.
How To Find Inventory Turnover Ratio is pretty simple. You can see a formula of how to do it below:
Cost of goods sold
A bakery company by the name of john goodies at the end of the year reported that they have sold $100,000 of goods. At the start of the year his starting inventory was $50,000 and his ending inventory was $60,000. His inventory turnover ratio would be.
________ = 1.8
($50,000 + $60,000)/2
His inventory ratio is 1.8 but that’s not bad because he almost went through his inventory 2 times which is impressive for a small business. Especially if he is selling in a small community where there is not much citizens.
In summary calculating the value of your inventory turnover ratio, will give you a scope of how impressive your business have performed over a period of time.
As an inventory manager a value like this is really important. It will help you to keep better track of your inventories moving in and out of your warehouse. As an accountant you will surely benefit from this it will assist in showing you how well financially your business has performed.
This will help to give a much clearer prediction of how it will perform the next upcoming year. In retrospect it will surely alter your business decisions.
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