Retail Dogma

Inventory Turnover

What is Inventory Turnover Ratio?

Inventory turnover ratio (IT) measures how many times a company turns its inventory during a certain period of time. It gives an idea about how efficiently a company is managing its inventory.

Inventory Turnover Ratio

How To Calculate Inventory Turnover?

Inventory Turnover Formula:

Inventory Turnover (IT) = COGS ÷ Average Inventory

To calculate IT you will need the COGS for that period and the average inventory for the same period.

Average inventory is used because typically the level of inventory varies throughout the year, depending on seasonality and events.

How to Calculate Average Inventory?

To calculate the average inventory use the below formula

Average Inventory = (Beginning Inventory + Ending Inventory ) ÷ 2

The beginning and ending inventory is taken at cost value.

COGS Not Sales

When you calculate the inventory turnover you do not use sales in the formula, but rather the COGS (cost of goods sold).

Using the sales value instead will give a misleading result, because the average inventory in the same formula is taken at cost value, and not at retail value.

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What Is a Good Inventory Turnover Ratio for Retail?

Deciding whether your Inventory Turnover is high or low depends on which retail category you are in. Below is a list of benchmarks by retail category.

Retail Category Inventory Turnover
Family Clothing Stores 3.2
Furniture Stores 3.4
Supermarkets 14.5
Pharmacies 14.2
Cosmetics Stores 4.2
Office Supplies Stores 8.3
Household Appliances Stores 4.7

Not all retail businesses are expected to turn their inventory at the same rate. This differs based on the types of products they carry. For example, supermarkets and pharmacies turn more frequently than fashion businesses, because they need to replace their inventory faster.

So while comparing your own figure, make sure to compare it with the category your business belongs to.

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