One of the Key Metrics or Key Performance Indicators KPI’s that are discussed and reported on is Inventory Turns. You will also sometimes see Inventory Turns referred to as stock turnover, stock turns. This metric is one that is normally reported on by companies that carry inventory on hand.
The Inventory Turn ratio is, in simple terms, how long it takes for a business to sell through its entire inventory.
If you search on inventory turns formulas, you can find various formulas that are used to calculate inventory turns. One of the most common formulas is to divide the Cost of Goods Sold (COGS) by the average inventory. Below is an example of the steps to perform to calculate inventory turns:
Your first consideration is to determine the timeframe to measure. For example, you might look at a year, quarter, or in some cases a month. If your business has an inventory that is seasonal in nature you generally look at a longer period of time such as a year or 6 months. Once you have determined the period of time to consider you want to determine your average on-hand inventory.
To determine the average simply take the starting inventory balance for the period you are calculating and add it to the ending inventory balance for the period. Now divide that number by 2 to obtain the average.
Take the Cost of Goods Sold for the same period and divide it by the average inventory (COGS / Average inventory).
COGS = $120,000 / $50,000 = 2.4 inventory turns
COGS = $300,000 / $50,000 = 6.0 inventory turns
Generally, the higher the number of inventory turns the better your business is performing for this KPI. Other things to consider are the trade-off and consideration of loss of sales if you do not have the inventory on hand to meet the demand. You can compare this to another KPI often reported which is On-Time Shipping Performance. Most companies report on this KPI as well.