What Is an Inventory Turnover Ratio?

Inventory turnover rate is the number of times inventory goods have been rotated in a certain period of time. It is an indicator that reflects the speed of inventory turnover. A higher turnover rate indicates better sales. Under the conditions of material shelf life and funds, the target days of inventory control can be appropriately increased to ensure reasonable inventory. On the contrary, the number of days of inventory control can be appropriately reduced. The formula is as follows:

Inventory turnover

Inventory turnover rate calculation formula

The calculation formula of inventory turnover rate can be calculated in the actual evaluation by the following formula:

Commonly used inventory turnover rate = annual cost of products sold / average inventory value for the year. The cost of the annual product sold, COGS (excluding sales expenses and management costs), is taken as the numerator, divided by the average annual inventory value. By analogy, the monthly inventory turnover rate is the monthly cost of sales divided by the average monthly inventory. The average monthly inventory is equal to the beginning inventory plus the ending inventory divided by 2.

Unusual formulas for other inventory turnover rates:

Inventory turnover rate = (used quantity / inventory quantity) × 100% The used quantity is not equal to the outbound quantity, because the outbound quantity includes a part of the spare quantity. In addition, there are also calculations of inventory turnover by amount. For the same reason, the amount used does not equal the amount shipped out.

Inventory turnover rate = (used amount / inventory amount) × 100% The amount of use is also good, the amount of inventory is also the amount of time, so when a certain period is required to study the amount, the following formula is used:

Inventory turnover rate = (Total outbound amount for the period / Average inventory amount for the period) × 100% = Total outbound amount for the period / [(Beginning inventory amount + Ending inventory amount) / 2] × 100% inventory turnover rate The calculation formula is (take the average monthly inventory turnover rate as an example):

1. Turnover rate of raw material inventory = total cost of raw materials out of the warehouse / average inventory of raw materials;

2. Turnover rate of in-process inventory = cost of finished product materials stored in the month / average in-process inventory;

3. Turnover rate of finished product inventory = monthly cost of materials sold / average finished product inventory.

Inventory turnover rate representation method

Different representation methods of inventory turnover rate:

Calculated by selling price (for units that use the selling price inventory method, sales / average inventory), calculated by cost (easy to observe the ratio of sales inventory to sales cost), calculated by sales (used to establish Related to the change of the product, the place where the product is placed and the sales staff plan, the unit inventory management is implemented), the calculation is based on the sales amount (the arrangement of working capital is convenient), and the calculation is based on the benefits and costs (based on the total sales, The average inventory amount is calculated by cost)

The selling price and amount sometimes change as the unit price changes, which affects the turnover rate result. So try to express the amount, such as weight (the total weight of the current warehouse out / the current average inventory weight).