How is Inventory Turnover Calculated?

By Nick Spooner
CEO at | Software and expertise for wholesaler optimization 

Over the last few years, data has become increasingly important to an organisation.

Wouldn’t you agree? Measuring every element of our business processes has allowed us to identify and improve upon weaknesses, reducing wastage and increasing efficiency.

This has been game-changing. Now, despite the number of KPIs you already have on your list, it’s time to add another important metric to your wholesale business calculations… Its name? An inventory turnover ratio.

What is an Inventory Turnover Ratio?

Put simply, an inventory turnover ratio is a financial formula that divides the times a company turned over its inventory by its cost of goods sold in a given period. Make sense?

It’s most frequently calculated on a month-by-month basis but has also proven itself useful to a firm’s annual review.

Inventory turnover ratios aim to give you a clear picture of whether or not you are being cost-efficient with your inventory storage and selling.
how is inventory turnover calculated

Why are Inventory Turnover Ratios Important?

Ultimately, if you are a wholesale business spending a considerable amount on storage – you want to make this money back.

As such, this “secondary” background spending absolutely needs to be factored into the cost you sell your products for.

However, it’s really hard to understand this information without using the inventory turnover formula to your advantage, comparing your cost of goods sold with your sales.

The Inventory Turnover Formula

While it might sound a little confusing at first, don’t worry.

There’s no need to be an expert mathemetician to figure out your inventory turnover ratio, as it’s actually really simple.

All you have to do is divide the cost of the goods you have sold over a given period by the average return of that inventory.

how is inventory turnover calculated


Then, you’ll be able to understand whether or not you are running a profitable business, allowing
you to:

  1. Identify overstocking.
  2. Improve your space management.
  3. Increase efficiency.
  4. Reduce unnecessary spending.

However, don’t make the common mistake of forgetting to remove stock from your total that was lost due to damages or errors.

However, don’t make the common mistake of forgetting to remove stock from your total that was lost due to damages or errors.

What Do You Do With the Inventory Turnover Output?

Once you actually have a clear picture of whether or not you are overspending on certain stock (without a substantial enough return), you can factor this into your:
  • pricing
  • ordering
  • advertising
  • decision-making
Typically, a low inventory turnover would mean you are either underselling items (so you need to promote them more) or that you are holding additional volume unnecessarily.

Neither of these are particularly ideal.

If you can’t address the problem with more advertising, you might then decide to either write off stock entirely – accepting it as a loss – or put a sale on to shift the items. From there, you could also significantly reduce your future order size.

What is Considered a Good Inventory Turnover Ratio?

A wholesale business like you with long-lasting products should want its inventory turnover ratio result to fall anywhere between 5 and 10.

This translates to an average turnaround time of 1-2 months – meaning you don’t have stock on your shelf for ages without being sold.

It’s the sweet spot.

As Netsuite acknowledged, though, a seller of perishable goods would want a much higher result, possibly nearing 20 or 30. They’d need to be moving items within a few weeks or even days.

The Benefits of Knowing Your Inventory Turnover Ratio

Although it just seems like another metric in a long list of the ones you have to keep track of…

Inventory turnover ratios can prove particularly useful to every wholesale business that stores its own stock.

At the end of the day, you don’t want to be dedicating space on your shelves to something that isn’t going to give you a good return on investment (or, really, any value at all).

By taking the time to calculate your inventory turnover ratio and apply it to different stock items, then, you can decide what is worth keeping and what is a drain of your resources.

That is an advantage you can’t ignore.

Inventory Turnover Rate vs. Sell-Through Rate

When you start using the inventory turnover formula, you need to recognise that it’s not the only KPI that you can use to your advantage.

There is the similarly focused sell-through rate, which, according to Shopify, is…

“The amount of inventory sold within a time period as a percentage of the amount of inventory you received from your manufacturer(s) during the same period.”

Both can be valuable metrics to your wholesale business and therefore shouldn’t be discounted, or replaced for one or another.

In today’s data-driven world, you’d do best to onboard both to your monthly calculations in order to make smarter decisions.

Better Manage Your Inventory Turnover Ratio with SalesOrder

Calculating your inventory turnover ratio doesn’t have to be complicated.

With SalesOrder, you can access metrics like this (and more) with just a click of a button.

  1. We offer comprehensive wholesale inventory management through our ERP software’s business intelligence, which also:
  2. Automates your stock ordering to reduce wastage in your organisation.
  3. Offers CRM elements for you to communicate with your stakeholders.
  4. Reduces the amount of administration required during accounting processes.

Do these features sound like something you could benefit from?

Whether you have a B2B e-commerce platform that you’d like to make more profitable or sell specialist wholesale goods, we can support you in scaling your business and meeting your targets.

Request a demonstration today.

How is Inventory Turnover Calculated? - FAQs

While the inventory turnover ratio can be a little hard to wrap your head around, it’s actually very simple and can provide excellent insight into the efficiency of your space management.

If you find that you are losing money by storing excess stock, you can move to action this problem and save yourself a lot of resources in the future.

Do you still have questions about how inventory turnover is calculated? Perhaps these FAQs can provide the solution you are seeking.
When you have a new line of products in, you should identify inventory turnover every month. After the first 6 months though, if there have been no problems, you might decide to wait for longer between each calculation.

It is. It actively shows you the progress of your business over a given period of time and can demonstrate whether or not you are being efficient with your space management and product optimisation. Then, you can make changes accordingly.

While it’s not a legal necessity, inventory turnovers can be useful for your balance sheet as they give you a good idea of asset value in your company. There’s no point believing you have loads of money sat in products if they aren’t going to sell.

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