![]() Your inventory turnover ratio is viewed as being either low or high. How should I use inventory turnover statistics? That means over the course of that year, you turned inventory two times. And then let’s say your Average Inventory was $100,000 (what your products were valued at). Again, that is the total cost of what was used to produce your sold products (including things like cost of materials, warehousing costs, and direct labor expenses). ![]() Let’s say your Cost of Goods Sold was $200,000. Here’s an example of how to calculate your own inventory turnover: Your inventory turnover ratio is calculated by: Cost of Goods Sold / Average Inventory = Inventory Turnover RatioĪre you ready to transform how your business does inventory? Net Income is your Revenue – COGS – Expenses Step 3: Calculate Your Inventory Turnover Ratio Gross Income is your Gross Revenue – COGS Other calculations business owners sometimes like to calculate with the COGS number are gross income and net income. It is calculated by: Beginning Inventory (costs at the beginning of the year) + Purchases During the Year – Ending Inventory (inventory at the end of the year)Įxample: Your beginning inventory was $50,000. This includes the expenses and costs of goods manufactured and merchandise that was sold. The Cost of Goods Sold is a calculation for all the costs involved in selling your merchandise. Step 2: Calculate Your Cost of Goods Sold (COGS)Ĭost of Goods Sold (COGS) is also known as Cost of Sales or Cost of Services. Divide that by two and your Average Inventory is $100,000. Your beginning inventory balance is $50,000. Your Average Inventory (AI) is calculated by: (Your Ending Inventory Balance + Your Beginning Inventory Balance) / 2Įxample: Your ending inventory balance is $150,0000. You can obtain this information by looking at your closing inventories and opening inventories. Your Average Inventory (AI) is a calculation (or a very good estimate) of the value of your company’s inventory over a set period of time. Step 1: Calculate Your Average Inventory (AI) Keep in mind each time period is different depending on the industry, so periods will range from yearly to quarterly or monthly.Ĭost of Goods Sold is also known as Cost of Sales or Cost of Services. There are a few steps to calculating your inventory turnover, including first calculating your Average Inventory and Cost of Goods Sold. Are you selling inventory quickly or does the majority of your inventory tend to sit in the warehouse? Should you be ordering more inventory to increase sales? Should you try to market your merchandise differently? When you know your inventory turns ratio, it will be easier to confidently answer these questions.īut first, you need to know how to calculate your inventory turnover ratio. Knowing how to properly understand and calculate your inventory turnover can lead to promising news for your business.
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