Buyers: Know Your Inventory Turnover Ratio!

PurchTips edition #185

 

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By Charles Dominick, SPSM, SPSM2, SPSM3

Picture of Charles Dominick, SPSM, SPSM2, SPSM3

What Is Your Inventory Turnover Ratio?

The inventory turnover ratio indicates how well your organization is managing its purchased assets. Inventory turnover is the number of times that your inventory is replenished in a year. Low inventory turnover means that you are carrying too much inventory, thereby unnecessarily restricting your company's access to cash that it could be using to invest in profit-generating activities, pay its bills, or even stay in business!

So, how do you calculate your inventory turnover ratio? Well, there are actually a couple of ways. Inventory turnover can be for a single item or for overall inventory.

Here's the formula for a single item:

ITR = US / [(BI + EI) / 2]

Where,

ITR = Inventory turnover ratio

US = Units sold in last 12 months

BI = Beginning inventory (the number of units in stock at the beginning of the 12-month period)

EI = Ending inventory (the number of units in stock at the end of the 12-month period)

When calculating the inventory turnover ratio for the overall inventory, you need some financial numbers. Here's the formula for overall inventory:

ITR = YCIS / [(BIV + EIV) / 2]

Where,

ITR = Inventory turnover ratio

YCIS = Your cost of inventory sold in last 12 months

BIV = Beginning inventory value (the total value of inventory at the beginning of the 12-month period)

EIV = Ending inventory value (the total value of inventory at the end of the 12-month period)

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