Average inventory is used instead of ending inventory because many companies’ merchandise fluctuates greatly throughout the year. For instance, a company might purchase a large quantity of merchandise January 1 and sell that for the rest of the year. Sales have to match inventory purchases otherwise the inventory will not turn effectively. That’s why the purchasing and sales departments must be in tune with each other. An insightful weekend read on market trends, company stories, and historical events.

Conversely, a lower ratio may suggest overstocking, obsolescence, or deficiencies in the product line or marketing effort. A low inventory turnover ratio often highlights products that are not selling as expected, signaling a potential misalignment between current offerings and customer demand. By identifying these trends early, businesses can adjust pricing strategies, launch targeted promotions, or reassess product assortments to improve liquidity and avoid excess carrying costs. The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period.

Now, any item with a turnover below your threshold will stand out, making it easy to spot which items are not moving as quickly as they should. The first step is to set up a spreadsheet where you can track your inventory details. You don’t need to be an Excel whiz for this, so don’t worry if you’re just getting started.

#5 – Asset Turnover Ratio

This can be weekly, monthly, or quarterly, depending on the size and nature of your business. Consistency is key to maintaining an accurate view of your inventory health. Having a well-structured and insightful spreadsheet is fantastic, but it’s only useful if you keep it updated. Regular updates ensure your data reflects your current inventory situation, allowing you to make timely decisions. With this formula, any item with a turnover under 2 will be labeled as “Slow”. This simple automation saves time and reduces the chance of human error in identifying items that need attention.

• In many cases, the more a company’s assets are tied up in inventory, the more they rely on faster turnover.
• That means you sold through your average inventory five times in the year, about once every 10 weeks.
• Then, enter your inventory values, COGS, turnover target, and reorder information.
• It is calculated by adding the value of inventory at the end of a period to the value of inventory at the end of the prior period and dividing the sum by 2.
• To really understand why some items are slow-moving, it helps to look at sales trends over time.

Calculate Inventory Turns

• By understanding and analyzing ITR, businesses can make informed decisions to optimize their inventory levels, reduce costs, and improve profitability.
• We’ll cover everything from setting up your spreadsheet to running the formulas that will reveal which items need your attention.
• Ending inventory is the value of unsold stock at the close of the accounting period.
• In some cases, the inventory value is the average cost of the inventory at the start of the year (if we’re calculating our metric annually) and the inventory cost at the end of the year.
• For example, a clothing retailer company’s turnover can be 5 to 8, whereas an automotive parts company may have an inventory turnover of 45 to 50.

For example, the finance and service sectors have the highest averages for inventory turnover. So, to lower your stocks and improve your cash flow, you need good inventory management. Applying number formatting ensures consistency, while conditional formatting can highlight anomalies like unusually high or low turnover rates. Color coding can flag potential issues, making it easier to identify trends that require further analysis.

Cost of Goods Sold

The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory balance for the matching period. The inventory turnover ratio formula is calculated by dividing the cost of goods sold for a period by the average inventory for that period. From the perspective of the warehouse manager, the introduction of Excel analytics meant a shift from intuition-based to data-driven stocking decisions. The finance department appreciated the clear visibility into inventory costs and turnover rates, which facilitated better budgeting and cash flow management.

Asset Turnover Ratio

Kelly Main is a Marketing Editor and Writer specializing in digital marketing, online advertising and web design and development. As this example is for a restaurant, I will calculate the ratios for food and beverages separately. If you work with different products and types of goods, it’s a good idea to calculate their ratios separately. In this example, I will calculate inventory turns and inventory days for a restaurant.

Inventory Turnover and Dead Stock

Efficient inventory management is essential for businesses to maintain profitability and avoid excess stock or shortages. One key metric for assessing this efficiency is inventory turnover, which measures how often a company sells and replaces its inventory over a given period. Calculating this in Excel allows for quick analysis and better decision-making. This document provides information on calculating inventory turnover ratio using different methods and formulas. It defines inventory turnover ratio as the cost of goods sold divided by the average inventory at cost. It notes that net sales can be used instead of cost of goods sold if cost of goods sold is unknown.

From the perspective of a financial analyst, the ITR is a key indicator of a company’s liquidity and operational efficiency. It provides insights into how well a company manages its cash flow and can be a predictor of its financial health. For a supply chain manager, the ITR offers a lens through which to view the effectiveness of supply chain processes, including procurement, production, and distribution. Retailers, particularly, monitor this ratio to determine the balance between carrying costs and stockouts.

Inventory Turnover calculation in Excel

From setting up your spreadsheet to using formulas and charts, you’ve got a toolkit that can help you manage your inventory more effectively. To really understand why some items are slow-moving, it helps to look at sales trends over time. Before we jump into Excel, let’s chat about what slow-moving inventory actually means.

Thus, in this example, the entire stock rotates two and a half times during the year. I’ve been using this KPI for the formula for inventory turnover in excel last 15 years as a demand planner, Supply Chain Manager, S&OP Manager, Supply Chain Director, and Consultant. And I am always surprised to see so many companies not tracking correctly this crucial indicator, or even not tracking it at all. Working Capital is the difference between the current assets and current liabilities of a company.