1. What is Inventory Turnover Ratio?

The Inventory Turnover Ratio measures how many times a company's inventory is sold and replaced over a period. It indicates how efficiently a company manages its inventory levels.

2. How Does the Calculator Work?

The calculator uses the Inventory Turnover formula:

Where:

• \( \text{Cost of Goods Sold} \) — Total cost of goods sold during the period
• \( \text{Average Inventory} \) — (Beginning Inventory + Ending Inventory) / 2

Explanation: The ratio shows how quickly inventory is converted into sales. Higher ratios typically indicate better performance.

3. Importance of Inventory Turnover

Details: This ratio is crucial for assessing inventory management efficiency, identifying potential overstocking or understocking, and comparing performance against industry benchmarks.

4. Using the Calculator

Tips: Enter COGS and average inventory in dollars. Both values must be positive numbers. For average inventory, use (beginning inventory + ending inventory)/2.

5. Frequently Asked Questions (FAQ)

Q1: What is a good inventory turnover ratio?
A: It varies by industry. Higher ratios are generally better, but too high might indicate stockouts, while too low suggests overstocking.

Q2: How often should I calculate this ratio?
A: Typically calculated annually, but can be done quarterly for more frequent monitoring.

Q3: What if my ratio is too low?
A: Consider reducing inventory levels, improving sales strategies, or reviewing product mix.

Q4: Does this ratio work for all business types?
A: It's most relevant for businesses that carry physical inventory (retail, manufacturing). Less applicable for service businesses.

Q5: How does this ratio relate to Days Inventory Outstanding?
A: Days Inventory Outstanding = 365 / Inventory Turnover Ratio. Both measure inventory efficiency but present it differently.