Inventory turns is a key metric for any business that carries inventory. It tells you how many times your inventory is “turning over” or selling in a given period of time. A higher number of inventory turns means that your business is selling through its inventory faster, which is generally a good thing.
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There are a couple of different ways to calculate inventory turns, but the most common is simply to divide your sales for a period of time by your average inventory levels. For example, if your business sold $100,000 worth of goods in a month and your average inventory levels were $20,000, your inventory turnover for that month would be 5 ($100,000/$20,000).
You can also calculate inventory turns on a per-year basis by dividing your annual sales by your average inventory levels. So, using the same numbers as above, if your business sold $1,200,000 worth of goods in a year and your average inventory levels were $240,000, your inventory turnover for that year would be 5 ($1,200,000/$240,000).
There’s no “right” number of inventory turns that all businesses should aim for. The ideal number will vary depending on the industry you’re in and the type of products you sell. However, a good rule of thumb is that businesses should aim for an inventory turnover of at least 4-5 times per year.
If your inventory turnover is low, it could be a sign that you’re carrying too much inventory or that your products aren’t selling as quickly as you’d like. If it’s high, it could mean that you’re not carrying enough inventory to meet customer demand. Either way, it’s a good idea to keep an eye on your inventory turnover and make sure it’s in line with your business goals.
Inventory turnover is a measure of how fast a company sells its inventory. The higher the number, the better. A company that sells its inventory quickly is able to generate more revenue and profit than a company that doesn’t.
Inventory turnover is calculated by dividing the cost of goods sold (COGS) by the average inventory.
COGS = (Beginning Inventory + Purchases) – (Ending Inventory)
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Inventory Turnover = COGS / Average Inventory
For example, let’s say a company has a beginning inventory of $10,000, purchases of $15,000, and an ending inventory of $12,000. The COGS would be $13,000 ($10,000 + $15,000 – $12,000). The average inventory would be $11,000 ($10,000 + $12,000 / 2). The inventory turnover would be 1.18 ($13,000 / $11,000).
A high inventory turnover is good because it means that a company is selling its inventory quickly. A low inventory turnover is bad because it means that a company is not selling its inventory quickly enough.
Inventory turnover can be affected by a number of things, including the type of products a company sells, the seasonality of a company’s products, and the efficiency of a company’s operations.
Companies should strive to have a high inventory turnover. A high inventory turnover means that a company is selling its inventory quickly and generating more revenue and profit.