3 Steps To Calculating Inventory Turns Per Year

By BenOni | March 15, 2023

Your company’s inventory turn rate is a key metric that tells you how quickly your company is selling its inventory. A high inventory turnover rate is generally indicative of a healthy business, while a low inventory turnover rate may be indicative of a number of problems, such as poor sales, inefficient production, or excessive inventory levels.

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There are a few different ways to calculate your company’s inventory turnover rate, but the most common method is to simply divide your company’s total revenue by your company’s average inventory level.

Here’s a step-by-step guide to calculating your company’s inventory turnover rate using this method:

Determine your company’s average inventory level

The first step is to determine your company’s average inventory level. You can do this by taking your company’s ending inventory level for a particular period (usually a month or a quarter) and adding it to your company’s beginning inventory level for that same period, then dividing the result by two.

For example, let’s say your company’s ending inventory level for the month of January is $10,000 and your company’s beginning inventory level for January is $5,000. Your company’s average inventory level for January would be $7,500 ($10,000 + $5,000 / 2).

Determine your company’s total revenue

The next step is to determine your company’s total revenue for the same period that you used to calculate your average inventory level.

For example, if you’re calculating your inventory turnover rate for the month of January, you would need to find your company’s total revenue for January.

Divide your company’s total revenue by your company’s average inventory level

Once you have your company’s average inventory level and total revenue for the same period, you can finally calculate your inventory turnover rate by dividing your company’s total revenue by your company’s average inventory level.

Using our example from before, if your company’s total revenue for January is $100,000, your company’s inventory turnover rate for January would be 13.3 ($100,000 / $7,500).

Interpreting your company’s inventory turnover rate

Now that you know how to calculate your company’s inventory turnover rate, you may be wondering what an “ideal” inventory turnover rate is. Unfortunately, there is no magic number that all businesses should aim for.

The appropriate inventory turnover rate for your business will depend on a number of factors, such as the type of business you’re in, the products you sell, your production process, and your customer demand. That being said, most businesses should aim for an inventory turnover rate of at least 4 or 5.

If your company’s inventory turnover rate is below 4 or 5, it may be indicative of a number of problems, such as poor sales, inefficient production, or excessive inventory levels. However, it’s important to keep in mind that there are a number of factors that can affect your inventory turnover rate, so you should always compare your company’s rate to its own historical rates and to industry norms.