Video:How to Find the Inventory Turnover

Transcript:How to Find the Inventory Turnover

Hi, I'm Kaytie Sproul, here for About.com, and today I'm going to show you how to find the inventory turnover, using information from About.com's Retailing site.

Formula for Inventory Turnover

Knowing how to calculate inventory turns will ensure that you have proper inventory control in your store. Follow these steps. The formula for calculating inventory turnover is net sales, divided by average retail stock. Let's say your net sales for the year are $350,000 and your average retail stock is $110,000. You'll divide $350,000 by $110,000 and get 3.1818. What this means is that you sell all of your inventory about three times a year.

Second Formula for Inventory Turnover

Another way to calculate your inventory turnover is to take your beginning inventory at cost, and add purchases at cost. From there, you'll subtract the ending inventory at cost, and then subtract the cost of lost or scrapped items, if applicable. Finally, divide this figure by the cost of sales, and you've got your turnover rate.

Example of Calculating Inventory Turnover

Let's take a closer look at this method with a practical example. Say your beginning inventory at cost is $1,000,000 and your purchases at cost are $220,000. Adding those two figures together gives us $1,220,000. From this, we subtract the ending inventory at cost, which is $595,000; this equals $625,000. Now subtract the cost of lost or scrapped items, in this instance, $44,000. That comes to $581,000, which now needs to be divided by the cost of sales. The cost of sales is $200,000, so $581,000, divided by $200,000 is 2.905. In this scenario, all of this company's inventory is sold and replaced about 2.9 times a year.

When to Calculate Inventory Turnover

Just a tip: Inventory turnover can be calculated in whole, by department, or by merchandise category. It can also be calculated monthly, quarterly, or bi-annually, depending on the needs of your business. While it's ideal to move merchandise quickly, a rate of turnover that's too high can equate to lost sales due to reduced customer selection. Knowing your inventory turnover will help you stay on top of ordering and repurchases so your business remains booming.

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