Understanding Turnover Ratio


Knowing how to calculate inventory turnover will help ensure that your store has proper controls in place. On this page a basic formula and an advance formula are featured. Also included is a video that walks you through both the basic and advanced versions with real world application examples.

Turnover Ratio Formula (basic)

Inventory Turnover Ratio = Net Sales / Average Stock

Example:
Net Sales: $220,000
Average Stock: $80,000

or $220,000 / $80,000 = 2.75

What does it mean? This ratio means that inventory is sold almost three times per year.

Here's a great video from About.com on how to calculate inventory turnover.

Alternative way to calculate (more advanced)

  1. Take Beginning Inventory at Cost
  2. Add Purchases at Cost
  3. Subtract Ending Inventory at Cost
  4. Subtract the Cost of Lost or Scrapped Items
  5. Divide by the Cost of Sales
If you operate a store, or are staffed with understanding accounting operations, this is an important business concept to understand. Knowing how this can be applied to your business will allow you to stay on top of ordering, trying to avoid having too much inventory at a given time.

For more information on this topic, Wikipedia has some good resources: http://en.wikipedia.org/wiki/Inventory_turnover 
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