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As a retailer, it is important to ask yourself whether your merchandise is turning faster or slower than it was this time last year. Is the above calculated Inventory Turnover a good ratio? That depends on your merchandise, business and sales model. How Do You Benchmark Your Inventory Turnover? They cycled their entire inventory twice in the overall Q3 period. They are turning over about once in 1.5 months. With this example, the retailer held onto their inventory an average of 45 days in a 90-day period.
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We will calculate above ratios based on the example numbers. If we divide the number of days within the calculated calendar period by the Inventory Turnover Ratio, we will find the average number of days that we held our inventory.ĭays Inventory Held = Days in Accounting Period / Inventory Turnover Ratio An Example For Calculating Inventory Turnover Inventory Turnover = COGS / Average Inventory
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You can calculate your Average Inventory for a specific period through the formula below, or by looking at your Balance Sheet:Īverage Inventory = Beginning Inventory + Ending Inventory / 2įinally, we can calculate Inventory Turnover based on the below formula: You can also calculate COGS by looking at your Profit & Loss Report. Make sure to subtract the cost of any scrapped or lost inventory. These numbers should include the purchase prices for your inventory, and also any additional costs such as shipping, storing, or handling. You can calculate your COGS for a specific period through the below formula:ĬOGS = Beginning Inventory + Total Purchase – Ending Inventory In order to calculate inventory turnover, we need to know two dollar amounts for the calculated specific period: Cost of Goods Sold (COGS) and Average Inventory. After all, people wear basic T-shirts more often, and they need them more than patterned ones. Basic plain T-shirts could have a higher inventory turn than designed T-shirts. Consider, for example, that you have an online store where you sell T-shirts. This is important because not all turnover rates are the same some items might turn more slowly than others. Assessing inventory turnover by item category would also be helpful to compare the performance of different items. Inventory turnover can be calculated for the entire business as well as by department or item category. In 2015, Amazon had an annual turnover of eight and Walmart had 7.8, whereas Costco has an inventory turnover of 11.2. For example if a retailer has an annual inventory turnover of eight, it means that they have completely sold out its entire inventory eight times over the whole year. It is a measure of the rate at which merchandise flows into and out of your store. Inventory turnover is the number of times that a retailer sells and replaces its inventory. Advertisement What Is Inventory Turnover?