1. What is Inventory Turnover?

Inventory turnover is a financial ratio that measures how many times a company's inventory is sold and replaced over a period. It indicates how efficiently a company manages its inventory and generates sales from its inventory investment.

2. How Does the Calculator Work?

The calculator uses the inventory turnover formula:

Where:

• \( COGS \) — Cost of Goods Sold ($)
• \( Average\ Inventory \) — Average inventory value during the period ($)

Explanation: The formula calculates how many times inventory is completely sold and replaced during a specific period, typically one year.

3. Importance of Inventory Turnover

Details: A higher turnover ratio indicates efficient inventory management and strong sales, while a lower ratio may suggest overstocking, obsolescence, or weak sales. It helps businesses optimize inventory levels and improve cash flow.

4. Using the Calculator

Tips: Enter COGS and average inventory values in dollars. Average inventory is typically calculated as (Beginning Inventory + Ending Inventory) ÷ 2. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good inventory turnover ratio?
A: Ideal ratios vary by industry. Generally, higher is better, but very high ratios may indicate stockouts. Compare with industry averages for context.

Q2: How is average inventory calculated?
A: Average inventory = (Beginning Inventory + Ending Inventory) ÷ 2. For more accuracy, use multiple inventory points throughout the period.

Q3: What's the difference between inventory turnover and days inventory outstanding?
A: Days inventory outstanding = 365 ÷ Inventory Turnover. It shows how many days inventory is held before being sold.

Q4: Can inventory turnover be too high?
A: Yes, extremely high turnover may indicate insufficient inventory levels, leading to stockouts and lost sales opportunities.

Q5: How often should inventory turnover be calculated?
A: Typically calculated annually, but quarterly or monthly calculations can provide more timely insights for inventory management decisions.