Inventory turnover (and Inventory turnover rate for retail) is an important accounting tool that retailers use to manage the store's inventory. The proper definition of this is how many times during a certain time period that you sell and replace (turnover) your inventory.
The figure results will indicate how fast the products sell on average. Inventory turnover can help you gauge how sales strategies are affecting the retail store's bottom line over time. Then you could use a free Sales Order App to help you improve your retail sales.
In this topic we will find out How to calculate Inventory Turnover Rate for Retail.
What is Inventory Turnover
"Inventory Turnover" is also called 'stock turns' or 'stock turnover'. Inventory turnover is a vital number to your retail business' accounting.
Because the retailers that handle inventory need to know the necessity of replacing or fulfilling their products, they need to keep track of their 'turns'. Clearly the Manufacturers don't want to be stuck with a lot of leftover inventory at the end of the season. Inventory turnover will help them understand, in fixed numbers, how your current inventory strategy is working. Do they stock too much or too little, or stock something the customers don't want? What is the results of the marketing strategies? Is cash is truly the king?
When it is used with the rest of the data on your profit & loss sheets, it can give you useful insights into the health of your business. It can also help guide you to make changes if needed.
It is a good idea to calculate your turns on a regular basis. Whether you run the numbers annually, seasonally, quarterly, or monthly will depend on the size, type, and age of your store.
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How to Calculate Inventory Turnover Rate for Retail
In order to calculate inventory turnover rate for retail, you need to know two numbers: Cost of Goods Sold (COGS) and Average Inventory.
To find your COGS:
COGS = Beginning Inventory + Purchases - Ending Inventory
This should include your wholesale costs for the inventory and any additional costs, such as shipping and handling, that you have paid. Also, be sure to subtract the cost of any scrapped or lost items.
To find your Average Inventory:
Average Inventory = Beginning Inventory + Ending Inventory / 2
The values of your inventory should be found on the company balance sheet for each accounting period.
To calculate your Inventory Turnover Rate for Retail:
Inventory Turnover = COGS / Average Inventories
The result you come up with will give you the Inventory Turnover Ratio. If you divide that into the number of days used in your accounting period, you receive the average number of days that you held the inventory.
Days Inventory Held = Days in Accounting Period / Inventory Turnover Ratio
Now you've done calculating the Inventory Turnover rate for Retail. We hope you will keep stock better.
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