How to Calculate Inventory Turnover
How to calculate average inventory: formula
Add the starting and ending inventory values, then divide by the entire time period to determine the average inventory:
Average inventory is calculated as (Beginning inventory minus Final inventory) / time.
Average inventory is frequently calculated over a single month as follows:
The formula for calculating average inventory is (inventory at the start of the month + inventory at the end of the month) / 2.
Using this formula, you could track the daily average of inventory or any other period of time.
What is average inventory?
Businesses use the average inventory calculation to determine how much inventory is typically available over a specific time period. It is typically calculated by dividing the number of accounting periods by the sum of the beginning and ending inventory balances.
The end of the month is typically when businesses count their inventory, but this number could be impacted by a significant end-of-month delivery of stock or a surge in outgoing stock. A better picture of how much inventory is typically available is obtained by averaging over two or more months.
To determine how much inventory the company needs to support sales, you can compute average inventory along with monthly revenue statements. This is accomplished by comparing a YTD average inventory calculation with a year-to-date revenue statement.
The typical value of the inventory that has been on hand over a specific period of time can also be represented by the average inventory. You determine the figure used by using the total value of those items rather than the total number of items in stock each month.
Inventory turnover
Example average inventory calculation
Let’s say you want to estimate your company’s average inventory by looking at a three-month period:
Using the average inventory formula, you’ll perform the following calculation:
Average inventory is equal to (Months 1 through 3 divided by 3).
(1,000 + 900 + 400) / 3 = 766 represented the average inventory count.
($4,000 + $3,900 + $800) / 3 = $2,900 was the average inventory value.
This indicates that during those three months, your company had an average of 766 items in stock, totaling $2,900 in inventory.
How to use average inventory calculations
You can employ the outcomes of your average inventory calculations in the following ways:
1. Calculating the inventory turnover ratio
The inventory turnover ratio is a useful indicator of how successfully your company can sell its goods and can be applied to stock management. For instance, if your business is buying excess inventory or there is a breakdown in communication between the purchasing and sales departments, your inventory turnover ratio may be low.
To figure out how frequently you had to restock during a specific time period, divide the average inventory by the cost of the inventory sold:
Example: Assume your average annual inventory value was $10,000 and your cost of sold inventory was $97,000. The annual average inventory turnover ratio is 97% of 10,000, or 9 7. So, on average, you had to replenish nine items. 7 times over the year to keep up with sales.
Due to frequent restocking, the average turnover ratio shows that sales were strong. It also implies that you might need to buy more stock overall to avoid having to replenish as frequently.
2. Calculating the average inventory period
To determine how long items stay in inventory before being sold, this calculation uses the inventory turnover ratio. Depending on the frequency you want to use, divide the total number of days, weeks, or months by the inventory turnover ratio to get the average inventory period:
Average inventory period = Time period / Inventory turnover ratio
Example: Your annual inventory turnover ratio is 7. 8. Divide 365 by 7 to get the average daily inventory period. 8, which is 46. 79. This means stock remains in inventory an average of 46. 79 days.
The average inventory period in this instance shows that your stock is sitting on the shelf for periods of time longer than a month. Your average inventory period will be compared to competitors to determine whether it is typical or unusual. If a period of 46. Consider whether you need to increase sales or review your inventory management since 79 days is a high number.
FAQ
What is the formula of average inventory?
Average inventory equals (Beginning inventory + Ending inventory) / 2 is the formula for calculating inventory.
What is average inventory value?
Key Takeaways An estimate of the value or quantity of a specific good or group of goods over two or more specified time periods is known as average inventory. The median value of the same data set may differ from the average inventory, which is the mean value of an inventory over a specific time period.
