How is Inventory Turnover Calculated, and How can KIM Help You Achieve Your Optimum Turnover Rate?

You can calculate Inventory Turnover by taking Cost of Goods Sold from your income statement and dividing by the Average Inventory on Hand for any given time period. One way you can obtain your average inventory value is to add your current inventory cost value to your inventory value from the end of the last accounting period and divide by two. The end result of the inventory turnover calculation will be a ratio that tells you how many times you rotate or sell your inventory in a year.

Taking this Inventory Turnover Ratio One Step Farther

Once you have you inventory turnover rate in hand, you can use this number to tell you how many days it takes you to sell your complete inventory. Just take the number of days in a year (365) and divide by your inventory turnover rate. For example, if you calculated an inventory turnover rate of 6.5, this means that it takes you 365/6.5= 56 days to turn your inventory completely.

What Should My Inventory Turnover Ratio Be?

Inventory turnover rates vary greatly by industry. Retail stores typically have a higher inventory turn rate than a heavy equipment manufacturer, for example, but there are a few guidelines that can help you determine what rate you would like to attain. In general, a higher number is better because it means that you probably don't have an excess of inventory sitting on the shelves. Keep in mind, however, that a very high number may also mean that you aren't carrying enough inventory to meet your customers' demand. An interesting exercise to help you get a better idea of where you would like to be is to look at the easily-accessible financial statements from any publicly traded corporation to see what their inventory turn rates are. Just find the Inventory number on the Balance Sheet and the Cost of Goods Sold on the Income Statement and plug these numbers into the equation above to determine the turnover ratio.

If you are currently able to consistently meet customer demand with your existing inventory level, an excellent goal is to work at increasing your turnover rate, which means you will be managing your inventory more efficiently and will have less money tied up in inventory and therefore more money available for other uses.

How Can KIM Help Me Increase Inventory Turnover?

One of the primary purposes of Kinetic Inventory Management (KIM) is help you increase your inventory turnover rate. The way it does this is by calculating your average weekly sales for each and every product that you stock. This means you will no longer be guessing what your expected demand will be and therefore will no longer be guessing how much stock you should have on hand. You will basically be ordering only what you are selling. KIM does have settings that allow you to easily adjust a couple of variables that fine tune how much of each product you will be ordering at a time based on a safety factor called the Maximum Sales factor as well as individual vendor lead time. The Maximum Sales factor is a percentage that you can enter to help insure that you will have enough inventory on hand in case your actual sales are greater than average. We recommend starting out with a fairly low Maximum Sales Factor like 10% until you feel like you have a good understanding of your inventory levels. Then you may want to adjust this factor up or down depending on how "rich" or "lean" you want to run your inventories.