![]() This calculation makes use of the inventory turnover ratio to determine how long items remain in inventory prior to being sold. Read more: Inventory Turnover Rate: How To Calculate (With Formula and Tips) 2. It also suggests that you might need to increase the amount of stock you purchase so you don't have to restock as often. The average turnover ratio indicates that sales were strong because you had to restock frequently. In other words, you had to restock an average of 9.7 times over the year to keep up with sales. The average inventory turnover ratio for the year is 97,000 / 10,000, or 9.7. Inventory turnover rate = Cost of goods sold / Average inventoryĮxample: Let’s say your average inventory value over the year was $10,000 and the cost of inventory sold was $97,000. To calculate your inventory turnover ratio, divide the average inventory by the cost of the inventory sold to determine how many times you had to restock over a certain period: For example, if your inventory turnover ratio is low, your business is possibly buying too much stock or there is a miscommunication between sales and purchasing departments. The inventory turnover ratio is an effective measure of how well your business can sell its products, and it also can be used to manage stock efficiently. Here are a few ways you can use the results of your average inventory calculations: 1. Related: Tips for Calculating the Cost of Inventory Formula How to use average inventory calculations This means that over those three months, your business had an average of 766 items in stock at a total inventory value of $2,900. Using the average inventory formula, you’ll perform the following calculation:Īverage inventory = (Month 1 + Month 2 + Month 3) / 3 *Month 3: Inventory count is 400 with a total inventory value of $800* *Month 2: Inventory count is 900 with a total inventory value of $3,900* *Month 1: Inventory count is 1,000 with a total inventory value of $4,000* Let’s say you want to calculate your average inventory for your business by evaluating a three-month period: ![]() Related: How to Calculate Days in Inventory (With Examples) Example average inventory calculation You could similarly track the average of inventory each day, or any other time period using this formula. To calculate average inventory, add the beginning and ending inventory values and divide by the total time period:Īverage inventory = (Beginning inventory + Ending inventory) / Time periodĪ common calculation of average inventory is over a single month:Īverage inventory = (Inventory at the beginning of the month + Inventory at the end of the month) / 2 Related: What Is Inventory Management? Definition and Example Techniques How to calculate average inventory: formula A low inventory turnover shows sales are declining and there may be decreasing demand for those products. A high inventory turnover is good because it indicates a high demand for goods the company must frequently restock. Inventory turnover refers to the number of times a business sells and replenishes its stock of goods over a certain period of time. ![]() Instead of using the total number of items in stock each month, you use the total value of those items to determine the figure used. The average inventory can also represent the typical value of inventory available over a certain period of time. This is done by comparing the year-to-date revenue statement with a YTD average inventory calculation. You can use an average inventory calculation along with monthly revenue statements to determine how much inventory the business needs to support sales. Taking a mean average over two or more months gives a better picture of how much inventory is normally available. ![]() It’s commonly calculated by adding the beginning period inventory balance to the ending period inventory balance and dividing the number of accounting periods.īusinesses usually count inventory at the end of the month, but this number may be affected by a large end-of-month delivery of stock or a spike in outgoing stock. What is average inventory?Īverage inventory is a calculation businesses use to estimate how much inventory they typically have available over a certain period of time. In this article, we define average inventory and explore how to calculate it using a formula, plus ways you can use average inventory for your business. Calculating your average inventory can help you monitor stock levels and manage inventory flow. Inventory management is an important aspect of many businesses, from manufacturing to retail. ![]()
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