What is inventory turnover?

The concept of inventory turnover is responsible for showing companies whether a product is selling quickly or slowly. This indicator serves as a reference for those who market their articles, also helping them to make decisions. Among other things, it will serve to know information about the inventory management as:

  • The purchase agendas must be modified.
  • The price of the item needs to be adjusted further.
  • Changes in manufacturing volumes.
  • Promotions are required to market inventory.

For perishable goods such as clothing, the inventory turnover rate is especially important. There is a constant change in fashions, and storing unsold items can mean a lot of losses down the road. Saving inventory is a cost, since it is not generating ingresosfor the company

Calculate the inventory turnover rate

A simple formula is used to calculate the inventory turnover rate. The inventory rotation formula would be the cost of goods traded divided by the average inventory. The cost of goods sold implies the cost of the materials for the production of the products to which labor is also added. On the other hand, the inventory average is obtained by adding the inventory from the first month of a given moment to the last month of that period, dividing it by two.


Inventory Turnover Rate Formula = Cost of Goods Sold / Average Inventory

An example of an inventory turnover rate can be the following. A person sells her painted pictures and presents a cost of goods of 1.000 euros. The initial inventory was 3.000 euros and the final one was 4.000 (average 3.500 euros). If we apply the formula, the rate would be 29.

1.000 / 3.5000 = 29.

Low inventory turnover means the item may not be priced appropriately, may not be positioned properly, or there is not much demand for the product. On the other hand, when the opposite occurs and the inventory turnover rate is high, they are good news, except when the item cannot be kept in stock and sales opportunities are lost.

Tool to calculate the inventory turnover ratio

Know all the information about the inventory of a company, the different types that exist and how they are controlled to guarantee the correct operation of the company.

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