One of the best ways to measure how well your business manages inventory is by looking at your inventory turnover ratio. Whether you’re managing stock for multiple locations or shipping materials to customers, this simple calculation can give you valuable insight into how smoothly your supply chain is running. In this article, we’re breaking down what this ratio means and how you can use it to improve your business performance.
Breaking Down the Basics of Inventory Turnover Ratio
Your inventory turnover ratio is how many times your business sells and replaces its inventory over a given period, usually a year. In basic terms, it reflects how fast your stock is moving from your storage warehouse to the customer.
You can calculate your ratio with this basic formula:
Inventory Turnover Ratio = Cost of Goods Sold (COGS) ÷ Average Inventory
Your average inventory is the average amount of inventory you carried in a given period. You can calculate it with the formula:
Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2
Your cost of goods sold (COGS) is the direct cost of goods produced or purchased for sale, including raw materials and transport to inventory. However, this value does not include overhead like marketing or storage costs.
A higher inventory turnover ratio generally means that products are selling quickly and that you’re not holding onto excess inventory too long. A lower ratio may signal slow-moving stock, over-ordering, or other inefficiencies in your fulfillment chain.
Why This Ratio Matters to Businesses
Your inventory turnover ratio matters because it impacts three major areas:
Cash Flow: When inventory moves quickly, your money is tied up for a shorter period. That means you can more easily free up cash to reinvest in your business, such as for marketing or expansion.
Storage and Carrying Costs: If your inventory sits in storage too long, you incur more storage costs, including warehouse space and insurance. A healthy inventory ratio can help reduce wasted storage and free up warehouse capacity.
Customer Satisfaction: Faster turnover means you’re likely stocking the right products to meet demands and avoid stockouts. When your fulfillment operations are realigned, you improve service to your business customers and their end-customers, too.
How to Calculate Your Inventory Turnover Ratio
You can easily calculate your inventory turnover ratio if you have the right numbers.
- Calculate your COGS for the period, including direct production costs or the purchase of inventory items sold.
- Calculate your average inventory over that same period: Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2.
- Take those values and insert them into this formula: Inventory Turnover Ratio = Cost of Goods Sold (COGS) ÷ Average Inventory.
- Interpret your result. A ratio of 6 would mean you turned your inventory six times during that time period.
For example, let’s say your business had $150,000 of inventory at the start of the year, and $100,000 at the end. Your average inventory would be:
(150,000 + 100,000) ÷ 2 = $125,000
If your COGS for the year was $600,000, your inventory turnover ratio would be:
$600,000 ÷ $125,000 = 4.8
This means you replaced your average inventory approximately 4.8 times that year.
Keep in mind that that number alone doesn’t tell the full story. Compare your ratio over time by product line or against industry benchmarks to find economic trends or opportunities to optimize.
How to Improve Your Ratio
There are several ways you can work on improving your inventory turnover ratio. Consider applying these strategies to boost your ratio.
Streamline Fulfillment and Distribution
If your logistics operations are slow or fragmented, your inventory sits idle longer. Choosing a partner with efficient shipping, like ExpressTrac, can help you reduce lead times. Ultimately, less time in storage results in a better turnover ratio.
Accurately Track Inventory Data
Using real-time tracking can allow you to see which items move fast and which ones don’t. Identify underperforming SKUs and adjust ordering accordingly to reduce wasted inventory. With a fulfillment partner who provides accurate dashboards and analytics, you gain the insight needed to adjust reorder points.
Analyze Demand and Adapt Ordering
Forecasting demand by tracking market trends and customer buying habits helps you stock the right products at the right time. By scaling operations when demand rises, you remain ready without carrying extra cost during downtime.
Review and Refine Products
SKU rationalization matters. Pull slow-moving items and focus on the ones that sell well. Reducing variety or eliminating obsolete inventory can sometimes be the fastest way to improve your ratio.
How ExpressTrac Can Help
When you partner with ExpressTrac, you get a true logistics partner. With decades of experience and advanced technology integrations, we deliver fast, accurate, and reliable third-party fulfillment for businesses of all sizes. Improving your inventory turnover ratio starts with better movement, visibility, and control:
- Smarter Inventory Management: Real-time visibility keeps your stock levels accurate, so you can reduce overstock and free up cash flow.
- Streamlined Fulfillment: Optimized picking, packing, and shipping ensure products move quickly from shelf to customer.
- Scalable Solutions: Our custom logistics strategies flex with your business.
- Operational Accuracy: Fewer errors and faster delivery result in happier customers and faster turnover.
- Trusted Experience: Our over a century-long commitment to innovation and 24/7 support keeps your supply chain running efficiently.
If you want to simplify your fulfillment process, reduce excess inventory, and improve your turnover ratio, partner with ExpressTrac today. We handle the how, so you can focus on growth.