Inventory turnover ratio

Want to see how many times you sold your total average inventory over a period of time? Calculate your inventory turnover ratio to see how your business is performing.

QuickBooks help you calculate your inventory turnover ratio

Inventory turnover calculator

Use this tool to calculate how fast you’re selling your inventory to ensure you’re not overstocking.

Enter the total costs involved in selling your products.

Cost of goods sold
Calculate your COGS to reveal the totals costs involved in selling your products.
$
$0
$25M
Cost of goods sold

Calculate your average inventory cost for the year by adding 12 months of ending inventory balances together and dividing by 12.

Average inventory cost
Calculate your average inventory cost by adding 12 months of inventory costs together, plus the last end of month cost and divide by 13.
$
$0
$2M
Average inventory cost
A high inventory turnover ratio shows you’re quickly selling inventory and not overbuying.

Inventory turnover ratio

By John Shieldsmith

What is inventory turnover?

Inventory turnover is the percentage of your inventory that you sell during a specified period of time. This number is helpful not only for better managing your products and supply levels, but also for getting a general feel for how your business is performing.
If your inventory turnover is low, that usually means your sales are on the weaker side—products are sitting around for quite some time before actually being sold. Business owners who discover that their turnover needs some improvement might need to make some tweaks to their approach, such as lowering prices or changing products.
If your inventory turnover is high? For the most part, that’s good news! Your goods are in demand and you’re moving product efficiently. However, there are some challenges here as well. Too high of turnover rate, and you run the risk of running out of product. It could also indicate that your products are priced low—maybe too low.

How is inventory turnover calculated?

Inventory turnover might sound complex, but the math behind it is really quite simple. It uses numbers you should already have in your balance sheets and financial reports. There are actually two different ways to calculate your inventory turnover:
Method one:
Sales ÷ Your Average Inventory
During the year, let’s say you do about $70,000 in sales, and your average inventory balance is around $4,000.
$70,000 ÷ $4,000 = 17.5
This means you turn over your entire amount of inventory a little over 17 times each year. To figure out how many days you have inventory on hand, you just need to divide that number by 365. In doing so, you will discover that your average product is on the shelf for less than one day.
Method two:
Cost of Goods Sold ÷ Your Average Inventory
Using this method, you would divide your cost of goods sold by your average inventory balance.
$23,000 ÷ $4,000 = 5.75
This indicates that you are turning over your inventory nearly six times each year.
“But, wait!” you’re thinking now, “That’s way different than the number the first formula gave me!” That’s true—these methods will spit out different results.
So, which one should you use? Both of these equations have their pros and cons. The first is easy to calculate and gives an overall picture, but it doesn’t account for markup or seasonal cycles. The second is more accurate, but it requires a few more details to calculate.
It’s often smart to run both of these formulas to get a clearer idea of how efficiently you’re running your business.

What is considered a “good” inventory turnover ratio?

What is considered a strong inventory turnover ratio? Is there a benchmark number that you should be aiming for?
It all depends on your individual business and the sorts of products you sell. A large business that does millions of dollars in sales will naturally have a much higher number than a one-person operation.
But, generally, a higher inventory ratio is better. It means you’re fulfilling a demand and efficiently moving your products without having them sit on the shelf for months on end.
However, if your products are turning over so fast that you feel like you can’t keep up (and are possibly even leaving orders unfulfilled), you might need to make some adjustments to decrease your turnover ratio. The best inventory ratio is the one that keeps your business as profitable as possible.
What is considered a “good” inventory turnover ratio?What is considered a “good” inventory turnover ratio?

Can you improve your inventory turnover?

Here are a few things you can do to increase your inventory turnover:
  1. Lower your prices: Decreasing the price of your products (even for a limited time promotion) could help you move more product much quicker. People love a good deal.
  2. Step up your marketing: By focusing more on marketing the products you do have, you can increase demand for your items and thus sell more faster.
  3. Decrease your cost of production: If Lauren can score a better deal on the materials needed to produce your products, you can reduce the amount you’re investing in your inventory.
  4. Reduce the mmount of inventory on hand: Instead of maintaining an average inventory balance of $4,000, you can reduce that to $2,000—meaning you’d have less inventory to turnover at any given time.
Now, let’s assume that you have the opposite problem—your inventory ratio is too high. You are moving your items so fast, you can’t keep up. You’d like to slow down your inventory turnover a little bit.
Here are some things you can try:
  1. Raise your prices: Typically, increasing your cost leads to less goods sold—without negatively impacting the profit margin.
  2. Keep more inventory available: Having this buffer available increases the number for the second piece of the inventory turnover equation, meaning your turnover will be much lower and you won’t have to scramble to fulfill orders.

Wrapping up

Your inventory turnover ratio is one of the many indicators of a healthy and efficient business, and knowing the basics of how to properly manage your inventory is crucial for your success.

Frequently asked questions

Join over 7 million customers globally and find the QuickBooks plan that works for you.
Offer terms
*Discount applied to the monthly price for QuickBooks Online (“QBO”) and/or QuickBooks Online Payroll Core, Premium, or Elite (“Payroll”) is for the first 3 months of service, starting from the date of enrollment is free, followed by the then-current monthly list price. Your account will automatically be charged on a [monthly/annual] basis until you cancel. Each employee is an additional $4/month for Core, $8/month for Premium, and $10/month for Elite. Contractor payments via direct deposit are $4/month for Core, $8/month for Premium, and $10/month for Elite. Service optimized for up to 50 employees or contractors and capped at 150. The service includes 1 state filing. If you file taxes in more than one state, each additional state is $12/month for only Core and Premium. There is no additional charge for additional state tax filings in Elite. The discounts do not apply to additional employees and state tax filing fees. If you add or remove services, your service fees will be adjusted accordingly. Sales tax may be applied where applicable. To be eligible for this offer you must be a new QBO and/or Payroll customer and sign up for the monthly plan using the “Buy Now” option. This offer can’t be combined with any other QuickBooks offers. Offer available for a limited time only. To cancel your subscription at any time go to Account & Settings in QuickBooks and select “Cancel.” Your QBO cancellation will become effective at the end of the monthly billing period. The Payroll subscription will terminate immediately upon cancellation.You will not receive a pro-rated refund; your access and subscription benefits will continue for the remainder of the billing period. Terms, conditions, pricing, special features, and service and support options subject to change without notice.

QuickBooks Online requires a computer with a supported Internet browser (see System Requirements for a list of supported browsers) and an Internet connection (a high-speed connection is recommended). The QuickBooks Online mobile app works with iPhone, iPad, and Android phones and tablets. Devices sold separately; data plan required. Not all features are available on the mobile apps and mobile browser. QuickBooks Online mobile access is included with your QuickBooks plan.

The QuickBooks Online mobile and QuickBooks Self-Employed mobile companion apps work with iPhone, iPad, and Android phones and tablets. Devices sold separately; data plan required. Not all features are available on the mobile apps and mobile browser. QuickBooks Online mobile access is included with your QuickBooks Online subscription at no additional cost. Data access is subject to cellular/internet provider network availability and occasional downtime due to system and server maintenance and events beyond your control. Product registration required.

Cancellation policy: There’s no contract or commitment. You’re free to switch plans or cancel any time.

Usage Limits: QuickBooks Online Advanced includes unlimited Chart of Account entry. Simple Start, Essentials and Plus allow up to 250 accounts. QuickBooks Online Advanced includes unlimited Tracked Classes and Locations. QuickBooks Plus includes up to 40 combined tracked classes and tracked locations. Tracked Classes and Locations are not available in Simple Start and Essentials.

Features
  1. Each active QuickBooks Online Advanced subscription includes one license of Smart Reporting powered by Fathom. To import your data into the tool, your QuickBooks Online Chart of Accounts can’t exceed 3,000 active or inactive accounts.
  2. QuickBooks Online Advanced supports the upload of 1000 transaction lines for invoices at one time. 20% faster based off of internal tests comparing QuickBooks Online regular invoice workflow with QuickBooks Online Advanced multiple invoice workflow.
  3. Membership in Priority Circle and its benefits are available only to customers located in the 50 United States, including DC, who have an active, paid subscription to QuickBooks Desktop Enterprise or QuickBooks Online Advanced. Eligibility criteria may apply to certain products. When customers no longer have an active, paid subscription, they will not be eligible to receive benefits. Priority Circle Account Manager hours of operation are 9:00 AM to 5:00 PM PT Monday – Friday. Phone and messaging Premium support is available 24/7. Support hours exclude occasional downtime due to system and server maintenance, company events, observed U.S. holidays and events beyond our control. Intuit reserves the right to change these hours without notice. Terms, conditions, pricing, service, support options, and designated agent are subject to change without notice. Priority Circle offers a one-time $2,000 class credit.
Claims

†Run business easily claim: Based on survey of small businesses using QuickBooks Online, conducted September 2018 who stated average savings compared with their prior solution.

 

Terms, conditions, pricing, special features, and service and support options subject to change without notice.