Question 1

What is inventory turnover ratio?

Accepted Answer

Inventory turnover measures how many times you sell through your inventory in a given period. It is calculated by dividing cost of goods sold (COGS) by average inventory value. A ratio of 6 means you sell and replace your inventory six times per year.

Question 2

What is a good inventory turnover ratio?

Accepted Answer

It varies by industry. Grocery stores may turn inventory 14+ times per year. Furniture stores might turn it 4-6 times. Compare your ratio to industry benchmarks. Low turnover ties up cash; very high turnover can mean you are losing sales from stockouts.

Question 3

How do you calculate days sales of inventory?

Accepted Answer

Divide 365 by your inventory turnover ratio. If turnover is 6, you hold inventory for about 61 days on average. This tells you how many days' worth of sales you keep in stock.

Question 4

How can I improve inventory turnover?

Accepted Answer

Identify and discount slow-moving items. Use demand forecasting to reduce overordering. Negotiate smaller, more frequent deliveries with suppliers. Drop products with consistently low sell-through rates.

Question 5

What is the difference between inventory turnover and sell-through rate?

Accepted Answer

Inventory turnover measures how often you replace your entire inventory over a period. Sell-through rate measures the percentage of inventory received that was actually sold during that period. A sell-through rate of 80% means you sold 80 of every 100 units you stocked.

Question 6

How does excess inventory hurt my business?

Accepted Answer

Excess inventory ties up cash that could be used elsewhere, increases storage and insurance costs, and risks becoming obsolete or unsellable. For perishable goods, overstocking leads to waste. Even for durable products, holding costs typically run 20-30% of inventory value per year.

Question 7

How do I calculate average inventory?

Accepted Answer

Add your beginning inventory value to your ending inventory value and divide by two. For a more accurate number, average the inventory value at the end of each month across the period. Using just start and end values can be misleading if inventory fluctuates during the year.

Inventory Turnover Calculator for Construction

Inventory Turnover Calculator

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