Commercial Collections Blog

What is Inventory Turnover?

 

Inventory Turnover (also called inventory turns, stock turns, stock turnover) is  how many times inventory ‘turns over’ within a specified period.  Turning over means how many times inventory comes in and leaves to be consumed in production.  If inventory turnover ratio is high — your inventory policy involves buying more frequently.

Purchasing inventory involves two additional costs:  1.The cost of holding the inventory and 2. Delivery charges.  Buying less inventory more frequently, may result in higher delivery costs, but will have lower holding costs.

Desired level of inventory turnover largely depends on the type of raw materials used.  If the business uses a bulk of foreign-made raw materials in its production, ordering small shipments may not make sense. If raw materials are likely to spoil, there is no option of storing them for a long time.

1. Formula for Inventory Turnover

Inventory Turnover = Total Cost of Goods Sold / Average Inventory

2. Formula for Average Inventory

Average Inventory = (Inventory “beginning” + Inventory “ending”) / 2

3. Formula for Average Days to Sell

Average Days to Sell = 365 days / Inventory Turnover Ratio

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