Inventory Turnover Ratio: Definition, How to Calculate


Some compilers of Inventory Turnover Ratio Formula data (e.g., Dun & Bradstreet) use sales as the numerator instead of cost of sales. Cost of sales yields a more realistic turnover ratio, but it is often necessary to use sales for purposes of comparative analysis.

However, in a merchandising business, the cost incurred is usually the actual amount of the finished product paid for by a merchandiser from a manufacturer or supplier. Meanwhile, if inventory turnover ratio increases as a result of discounts or closeouts, profitability and return on investment might suffer. Retailers that turn inventory into sales faster tend to outperform comparable competitors.

Inventory Turnover Ratio Examples

This ratio strikes a good balance between having enough inventory on hand and not having to reorder too frequently. Inventory turnover is a great indicator of how a company handles its inventory.

  • Most effectively, ensure you have inventory management Excel templates that supports your inventory turnover goal.
  • In other words, the ratio measures how well a company can convert its inventory purchases into revenue.
  • However, because a high and low inventory ratio could mean several things, Tiara decided that she needed more information to understand how well they were doing.
  • They’re tying up cash, incurring holding costs, and at risk of deterioration.
  • Holding CostsHolding cost refers to the cost that an entity incurs for handling and storing its unsold inventory during an accounting period.

Additionally, you may consider setting automatic reorder notifications when your unit count for any particular SKU hits a certain level. Many tools enable this, and some even help you automate reordering altogether. Before you make drastic decisions regarding your inventory, analyze your marketing to ensure that your messaging, visuals, and navigation are on point . Determine if demand is there — and if you’re capturing it correctly. Income ratio is a metric used to measure the ability of a technology to recover the investment costs through savings achieved from customer utility bill cost reduction. The ratio divides the “savings” by the “investment”; an SIR score above 1 indicates that a household can recover the investment. However, if a company’s inventory has an abnormally high turnover, it could also be a sign that management is ordering inadequate inventory as opposed to managing inventory well.

Grow your retail business

Using this information, the company decides to adjust their strategy next quarter. If you aren’t comparing apples to apples, as we mentioned already, the inventory turnover ratio won’t give you accurate insight into how your business is performing. Make sure you’re accounting for discounts on items throughout the year, special campaigns or offers, and markup. That way, you can use this formula effectively and improve your tactics over time.

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