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. From increased profitability to optimized efficiency, a rigorous understanding of your inventory turnover is key to a streamlined inventory management operation, allowing you to make better decisions for your business. Secondly, average value of inventory is used to offset seasonality effects. Inventory turnover is the measurement of the number of times a business’s inventory is sold throughout a month, a quarter, or (most commonly) a year of trading. Inventory turnover is an essential inventory management metric that helps you do just that. Some companies may use sales instead of COGS in the calculation, which would tend to inflate the resulting ratio. Analysts use COGS instead of sales in the formula for inventory turnover because inventory is typically valued at cost, whereas the sales figure includes the company’s markup.
Inventory Turnover = Average Value of Inventory COGS where: COGS = Cost of goods sold Ĭost of goods sold (COGS) is also known as cost of sales. Investopedia / NoNo Flores Inventory Turnover Formula and Calculation
