Inventory Turns
Inventory turns, also known as inventory turnover, is a financial metric used to measure how many times a company’s inventory is sold and replaced over a specific period. It is an important indicator of a company’s efficiency in managing its inventory.
The formula to calculate inventory turns is:
Inventory Turns = Cost of Goods Sold / Average Inventory
For example, if a company had $1,000,000 in cost of goods sold and an average inventory of $200,000, the inventory turns would be 5 ($1,000,000 / $200,000).
A high inventory turns ratio indicates that a company is selling its inventory quickly and efficiently, while a low ratio may indicate overstocking or slow sales. It is important for companies to find the right balance to maximize profits and minimize costs.
Examples of Inventory Turns:
- Company A had a cost of goods sold of $500,000 and an average inventory of $100,000. Inventory turns = 5 ($500,000 / $100,000).
- Company B had a cost of goods sold of $1,000,000 and an average inventory of $250,000. Inventory turns = 4 ($1,000,000 / $250,000).
By analyzing inventory turns, companies can identify areas for improvement in their inventory management processes and make informed decisions to optimize their operations.
For more information on inventory turns, you can visit Wikipedia.