What are the best practices for calculating and benchmarking inventory turnover ratio in your industry?

1 How to calculate inventory turnover ratio

Inventory turnover ratio is the ratio of your cost of goods sold (COGS) to your average inventory value. COGS is the total cost of acquiring and producing the goods you sold in a given period, usually a year or a quarter. Average inventory value is the average of your inventory value at the beginning and end of the period. To calculate inventory turnover ratio, simply divide COGS by average inventory value. For example, if your COGS is $100,000 and your average inventory value is $25,000, your inventory turnover ratio is 4.

3 How to benchmark inventory turnover ratio

Inventory turnover ratio can vary widely across different industries and sectors, depending on the nature and price of the products, the seasonality and trends of the demand, and the competitive landscape. Therefore, it is important to benchmark your inventory turnover ratio against your industry average and your peers. You can find industry averages from various sources, such as trade associations, market research reports, or financial databases. You can also compare your inventory turnover ratio with your direct competitors or similar businesses in your niche. This will help you identify your strengths and weaknesses, and set realistic and achievable goals for improving your inventory management.

4 How to improve inventory turnover ratio

To improve your inventory turnover ratio, you must analyze your inventory data and sales patterns. This includes understanding which products are selling well and which are not, how demand fluctuates over time and across locations, and what factors influence customer buying behavior. Based on this information, you can implement strategies to optimize your inventory turnover ratio. These strategies include reducing excess or obsolete inventory by offering discounts, promotions, or donations, increasing sales volume by expanding your market, diversifying your product mix, or enhancing your marketing efforts, adjusting inventory levels according to sales forecasts, seasonal variations, and customer preferences, negotiating better terms with suppliers, and implementing inventory management software or systems to track and control inventory in real time.

5 How to monitor inventory turnover ratio

Monitoring inventory turnover ratio is essential for evaluating your inventory performance and making informed decisions. You should track your inventory turnover ratio regularly, at least quarterly or monthly, and compare it with your previous periods, your industry average, and your competitors. You should also monitor other related metrics, such as gross margin, days inventory outstanding, and inventory turnover days. These metrics will help you understand how your inventory turnover ratio affects your profitability, liquidity, and efficiency. If you notice any significant changes or deviations in your inventory turnover ratio or other metrics, you should investigate the root causes and take corrective actions.