Inventory Turnover Ratio

What Is the Definition of Inventory Turnover Ratio?

Inventory turnover ratio is commonly used to calculate how much inventory a business has sold and then replaced. This is specified over a certain amount of time. In order to calculate your inventory turnover ratio, you’ll first need to calculate your average inventory.

Inventory turnover ratio is often used in the restaurant and retail industries.

You can see how to calculate both your average inventory and inventory turnover ratio below.


How Do You Calculate Inventory Turnover Ratio?

Here’s a quick way to calculate your inventory turnover ratio:

Inventory Turnover = Sales / Average Inventory

This is how to calculate your average inventory:

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

So, what you have to do to calculate your inventory turnover ratio is:

  • Use the above formula calculate your average inventory (divide the sum of the beginning inventory and the ending inventory by 2)
  • Divide sales by average inventory

It’s as simple as that.


What Is a Good Inventory Turnover Ratio for Retail?

Having a good inventory turnover ratio helps a business manage waste and spillage. You don’t want to incur unnecessary costs, and you don’t want products or produce in your inventory that you’re unlikely to sell.

But what makes a good inventory turnover ratio?

It’s generally considered that a good inventory turnover ratio for retail is between 2 and 4. That said, you need to make sure that the number is right for your business – a ratio above 4 might not be great as it could suggest that your purchasing levels are too low.


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