Inventory Turnover Calculator
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Inventory Turnover Calculator
Inventory Turnover Calculator find out of inventory turnover by which a firm replaces inven- tory in a given period due to a sale. The inventory turnover calculator helps companies make better decisions about prices, production, marketing, and purchasing. If the inventory levels are at an adequate level and well managed, it means that the sale of the company is at the desired level, and the costs are under control. The Inventory Turnover Calculator helps us calculate the inventory turnover ratio, and this shows us the company’s success in converting inventories into sales.
It is necessary to follow the next steps:
What is Inventory?
Inventory is a term that includes raw materials for production, products in the production process, and finished products ready for sale. Depending on the company, some buy finished products from suppliers and sell them to their customers, and some e.g. they buy raw materials from which they make finished products. For both, it will be an inventory. But it is important to define a method for inventory control. Inventories represent the current balance that is recorded in the balance sheet. And they are expected to turn into cash quickly. When we sell a finished product it is recorded in the income statement as the cost of goods sold or shortly COGS.
What is Inventory Turnover?
Inventory Turnover is a calculation of inventory turnover by which a firm replaces inventory in a given period due to a sale. The inventory turnover calculator has a positive side as it helps companies make better decisions about prices, production, marketing, and purchasing. If the inventory levels are at an adequate level and well managed, it means that the sale of the company is at the desired level, and the costs are under control. The inventory turnover shows us how well a company makes sales from its inventories.
It is necessary to follow the next steps:
- Enter the value of total cost of goods sold (COGS). Generally COGS is always positive because a firm generally sells something no matter firm sells a large volume or small volume. COGS can be zero when no goods are sold. Therefore, this value cannot be negative;
- Enter the value of inventory balance for beginning inventory (BI);
- Enter the value of inventory balance for ending inventory (EI);
- Enter how many days there are in your financial year (365). This value must be positive;
- Press the ”CALCULATE” button to make the computation.
What is Inventory?
Inventory is a term that includes raw materials for production, products in the production process, and finished products ready for sale. Depending on the company, some buy finished products from suppliers and sell them to their customers, and some e.g. they buy raw materials from which they make finished products. For both, it will be an inventory. But it is important to define a method for inventory control. Inventories represent the current balance that is recorded in the balance sheet. And they are expected to turn into cash quickly. When we sell a finished product it is recorded in the income statement as the cost of goods sold or shortly COGS.
What is Inventory Turnover?
Inventory Turnover is a calculation of inventory turnover by which a firm replaces inventory in a given period due to a sale. The inventory turnover calculator has a positive side as it helps companies make better decisions about prices, production, marketing, and purchasing. If the inventory levels are at an adequate level and well managed, it means that the sale of the company is at the desired level, and the costs are under control. The inventory turnover shows us how well a company makes sales from its inventories.
How to calculate Inventory Turnover
For a company to function normally, money is needed. Initially, it is financed by various investors or lenders. Once a company starts operating, there are two sides. On one is the money for the maintenance of business that we receive from the sold products (cash inflow), and on the other from the short-term liabilities of financial institutions or suppliers (cash outflow).
Inventory turnover shows how many times an inventory is, on average, sold and registered as such over some time. Inventory turnover is very useful to us to see how efficient a company is in converting inventory into sales. This ratio can show us how many times the inventory has been sold during a certain period, usually 12 months or 365 days. We calculate inventory turnover by dividing the value of goods sold by our average inventory. We calculate the average inventory by adding the initial and final inventory and dividing it by two.
To calculate the turnover of stocks we use the following formula:
Inventory Turnover (IT) = COGS BI + EI 2
where COGS represents the cost of goods sold, BI represents the beginning inventory, EI repre- sents the ending inventory.
Inventory turnover shows how many times an inventory is, on average, sold and registered as such over some time. Inventory turnover is very useful to us to see how efficient a company is in converting inventory into sales. This ratio can show us how many times the inventory has been sold during a certain period, usually 12 months or 365 days. We calculate inventory turnover by dividing the value of goods sold by our average inventory. We calculate the average inventory by adding the initial and final inventory and dividing it by two.
To calculate the turnover of stocks we use the following formula:
Inventory Turnover (IT) = COGS BI + EI 2
where COGS represents the cost of goods sold, BI represents the beginning inventory, EI repre- sents the ending inventory.
What do days in Inventory represent?
Days in Inventory represents the number of days during which the company will convert inventories into sales, which gives a good indicator of the company’s financial performance. The company’s goal is to keep the days in stock low. If this number is high for us, it will generally be an indicator of the fact that the company is facing problems selling its inventory. Inventory days are calculated as follows:
Days in Inventory (DII) = DIY IT where DIY represents the number of days in a given financial period (usually 365), IT represents the inventory turnover.
What does our company’s inventory turnover tell investors?
If the stock turnover is higher, it is better. The high value of turnover shows that the stock was sold on average several times to build the total amount of value recorded as the cost of goods sold. On the other hand, the low value shows us that the company processes its inventory only a few times a year. When we look at inventory days, the smaller the number, the better. The high value of inventory days shows us that the company spends a lot of time rotating its products, thus taking more time to turn them into cash to maintain the business.
On the other hand, if the company needs fewer days to free up inventory, it will be in a better financial position because cash inflows will be stronger. Therefore, if you are an investor you want to be on the rise over the years to inventory turnover and decline in inventory days. The reasons why a company can achieve better inventory management are as follows:
- If a company improves its procurement process it may be that it has got better suppliers, so access to raw materials is easier and faster;
- The company has improved its production process by preparing products for sale in less time;
- The company analyzes the needs of customers and then precisely produces what customers want most so that it sells its products in a shorter period and thus sells faster.
On the other hand, if inventory ratios worsen, stagnation in the company’s growth may occur. This usually happens due to problems with suppliers, production processes, or competitors. The deterioration is mostly reflected in companies that produce cars or steel. Because if the company stores stocks for a long time, problems will arise. About inventory turnover and its management as we compare companies. It is best to choose the following criteria:
- A company that has a higher stock turnover is much better;
- A company that has fewer days of stock is much better;
- A much better company shows an appropriate trend slope over the last five fiscal years.
And one more thing, we should not compare companies like the type of company that sells mobile phones with the company that sells airplanes, because they will not have the same ratio of inventory turnover.