Inventory Turnover

Scenario:

You own a small e-commerce store that sells 500 pairs of shoes in a year. The total cost of producing these shoes (COGS) is $50,000. At the start of the year, your inventory was valued at $10,000, and by the end of the year, it was $15,000.

Step-by-Step Calculation:

1. Find the Average Inventory:

Average Inventory = Beginning Inventory + Ending Inventory

2

Average Inventory = 10,000 + 15,000

2

 = 12,500

1. Calculate Inventory Turnover:

Inventory Turnover = COGS

Average Inventory

Inventory Turnover = 50,000

12,500

 = 4

Interpretation:

• The inventory turnover is 4, meaning you sold and replenished your inventory 4 times during the year.
• This is a healthy turnover rate for many industries.

How to Use Inventory Turnover Ratio

• High Inventory Turnover: Indicates efficient inventory usage and high demand for products.
• Low Inventory Turnover: Signals potential issues such as overstocking, low sales, or ineffective inventory practices.