Increase on sales for inventory

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inventory turnover is a very important metric in retail and e-commerce it measures how many times a company sells and replaces its inventory during a given period of time usually calculated for a year this metric gives an idea about how efficiently a company is managing its inventory for example if inventory turnover for company a is 2 and for company b is 3 it simply means that company a has sold its entire inventory and replaced it 2 times over one year while company b has sold its inventory and replaced it three times but what does that exactly mean for the business let's say company a has invested an initial amount to buy inventory at the beginning of the year during the year the company sold this inventory entirely took the profit from those sales and invested the product cost back into the business and sold it again and pocketed the profits one more time company b has a higher inventory turnover at 3 so it was able to turn this inventory one more time and profit from it again during the same year how to calculate inventory turnover the formula for calculating inventory turnover is cost of goods sold divided by average inventory to calculate average inventory for the year you simply add the beginning inventory at cost value to the ending inventory at the end of the year and then divide the total by two you can find both the beginning and ending inventory in the balance sheet or if you are maintaining an open to buy excel sheet you will be able to find it there as well let's apply this formula to a practical example let's say the company's sales for last year were 125 000 at 45 percent margin beginning inventory was 50 000 dollars and ending inventory was sixty thousand dollars the average inventory calculated will be fifty five thousand dollars cost of goods sold equals sales multiplied by one minus 0.45 because the margin was 45 percent this gives us 68 750 applying the formula for inventory turnover we find that the result equals 1.25 so the company has sold and replaced its inventory 1.25 times in a year for most retail categories this is considered a very low inventory turnover what's the problem with a low inventory turnover if you found that you have a lower inventory turnover than the benchmark for your specific retail category this could mean one of two things your sales are low for the level of inventory you are buying and carrying in the business or you are overstocked for the level of sales your business can produce this signals trouble in both cases so you will need to dig deeper and see if the problem is in your sales and marketing efforts or your stock levels are just too high and you are holding back a lot of cash in the form of merchandise in the business what is a good inventory turnover ratio inventory turnover differs from one retail category to the other based on the nature of products and how fast they need to be turned for example you will find that supermarkets and grocery stores have high inventory turnover usually at around 14 and the same applies to pharmacies on the other hand for fashion stores an inventory turnover between three to four is considered good so when you calculate inventory turnover for your stores compare it with the benchmark for similar categories in the industry we keep an updated list of retail benchmarks based on the financial reports of publicly traded u.s retailers on our website so make sure to check it out for reference you