An inventory turnover is referred as the measurement of how many times a business has been used or sold in a specific time frame, usually in a year. Inventory turnover is like a track inventory that monitors the cost of goods sold and the net sales in a business.
There is a specific formula used in the process of analyzing inventory in order to evaluate the profits, competitiveness, and the progress of a business. The formula “Turnover = COGS/Average Inventory” is used in calculating a business inventory turnover.
How to Calculate Inventory Turnover and Inventory turns
Inventory turnovers are considered to be a critical portion of a business, that is why a careful process of calculating such must be done accurately with the help of inventory templates and the following guidelines:
- Choosing a time duration in calculating is the first thing to consider. There isn’t really a mandate which part of the year should it be calculated as long as you set a proper span of time in calculating in order for you to be guided.
- Find the COGS or the cost of goods sold for a specific time period. COGS represents the costs of manufactured goods and the labor costs.
- Divide the costs of goods sold by the average inventory value you are analyzing. In doing this, you have to add the starting inventory value for the time period chosen.
- Start using the formula “turnover – sales/inventory” for a quick estimation giving you a shorter way of the approximate value of the turnover inventory. The rule is, do not use this type of equation if not for quick estimates; most inventory templates use this formula.
- Use multiple key data for an accurate answer and use inventory turnover for approximate measures, then start comparing your inventory to the industry averages.
Importance of Inventory Turnovers
The following are the reasons why an inventory turnover is considered very important.
- Inventory turnover is very important because a company holds a very significant amount of money tied in its respective inventory.
- Inventory turnovers allow valuable usage of space for slow moving items in the business.
- Meeting the needs and expectations of the business is one of the main focus of inventory turnovers, that is why they are considered.
- Inventory turnovers also contribute to the financial success of a business through quick project (project templates) completion, fast customer acquisitions, fast response to customers, and efficient collection of invoices.
- Inventory turnovers also serve as key performance metrics in the efficiency of a quality business management, especially with revenue equations as well as the assets in the balance sheet (balance sheet templates).
- Specific insights are being provided on the duration of how long the cash is being tied up.
- Inventory turnovers are indicators of the business’s performance, whether it is better or lower performance.
- There is a quick and a much easier distinguishing of stock level, thus very beneficial to the production department.
- Identifies stock movements, therefore it would be easier to avoid business wastage.
With regards to calculating inventory and inventory returns, they are best done with inventory templates in PDF, which are similar to the sample inventory provided by this site.