1. What Is Inventory Turnover?

Inventory turnover is a financial ratio that measures how many times a company sells and replaces its inventory during a specific period. It indicates how efficiently a company manages its inventory levels.

2. How Is Inventory Turnover Calculated?

The calculator uses the inventory turnover formula:

Where:

• \( \text{COGS} \) — Cost of Goods Sold (total cost of inventory sold during the period)
• \( \text{Average Inventory} \) — Average value of inventory held during the period

Explanation: This ratio shows how many times inventory is sold and replaced over a specific period, typically one year. A higher turnover indicates better inventory management and sales performance.

3. Importance of Inventory Turnover

Details: Inventory turnover is crucial for assessing operational efficiency, identifying slow-moving inventory, optimizing stock levels, and improving cash flow management. It helps businesses avoid overstocking or stockouts.

4. Using the Calculator

Tips: Enter COGS and average inventory in the same currency units. Both values must be positive numbers. Average inventory is typically calculated as (Beginning Inventory + Ending Inventory) ÷ 2.

5. Frequently Asked Questions (FAQ)

Q1: What is a good inventory turnover ratio?
A: Ideal ratios vary by industry. Generally, higher ratios (5-10) indicate efficient inventory management, while very low ratios may suggest overstocking or poor sales.

Q2: How does inventory turnover affect profitability?
A: Higher turnover typically leads to better profitability through reduced holding costs, lower risk of obsolescence, and improved cash flow from faster inventory conversion to sales.

Q3: What's the difference between inventory turnover and days inventory outstanding?
A: Inventory turnover shows how many times inventory is sold per period, while days inventory outstanding calculates how many days inventory is held before being sold.

Q4: Can inventory turnover be too high?
A: Yes, extremely high turnover may indicate insufficient inventory levels, leading to stockouts, lost sales, and potential customer dissatisfaction.

Q5: How often should inventory turnover be calculated?
A: Most businesses calculate it quarterly or annually, but monitoring it monthly can provide more timely insights for inventory management decisions.