![]() Generally speaking, the higher your inventory turnover, the better. Of course, this is an average based on the figures you have to hand and so cannot provide an exact timeframe or number, but it helps in terms of contingency and future planning as well as sharing information with stakeholders. This tells you the number of days in which your stock is likely to be sold. For example, if your business had a year-end inventory of £10,000 and an annual cost of sales of £100,000, your inventory formula would look like this: Ratios and formulas can look complicated at first glance, but it’s a simple enough equation to work out. An example of an inventory turnover formula In the context of a financial year, this figure can be reached by dividing one by your inventory turnover and then multiplying the result by 365. Some businesses will then use this information to work out the day’s inventory, which helps you identify when or how often you need to restock. Your business’s cost of goods sold can be calculated based on the costs of materials and labor, or by the more straightforward sum of the amount paid to the supplier. In this calculation, the average inventory takes into account the cost of the beginning inventory and the cost of the end inventory. Your inventory turnover is typically worked out by dividing the costs of goods sold in a particular period by the average inventory. It’s an essential tool in a profit and loss forecast. ![]() It helps compare different periods to one another, so you can work out when demand is highest and when to expect a quieter season, as well as identifying which are your most popular products. Your inventory turnover ratio helps you work out how quickly your stock sells by showing how often you’re selling and replacing it.
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