2016-11-21 00:00:00 Inventory English Learn what inventory turnover is, how to calculate it and how to use it for inventory management in your small business. https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2017/03/08214826/Small-business-owner-in-surf-shop-calculating-inventory-with-laptop.jpg Calculate Inventory Turnover for Accurate Budgeting

# Calculate Inventory Turnover for Accurate Budgeting

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.

#### References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.
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