Calculate inventory turnover by dividing the cost of goods sold by the average inventory. The average inventory is the beginning inventory plus the ending inventory, divided by 2.
For example, assume that the month’s beginning inventory was $1 million and the ending inventory was $1.5 million. The cost of goods sold over the month was $800,000. The inventory turnover is:
$800,000 / (($1 million + $1.5 million) / 2) = $800,000 / $1.25 million = 0.64
Generally, for inventory turnover, a higher ratio is better than a lower ratio.
Knowing your company’s inventory turnover helps you manage its resources. It helps you avoid purchasing too much raw materials or products, and it helps you avoid selling out of popular items. Analyzing your inventory turnover helps you manage your total inventory efficiently.