Inventory Turns

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We give an overview of inventory turns and inventory accuracy. .
Inventory Turns is one of the key metrics that companies use to manage their inventory. Inventory Turns or  Inventory Turnover is the number of times that inventory cycles or turns over per year.
The Inventory Turns Calculation: A frequently used method is to divide the Annual Cost of Sales by the Average Inventory Level.
Example: For 2003, the ABC Widget company has a Cost of Sales = $36,000,000.
The company's Average Inventory during this time = $6,000,000.
             $36,000,000 / $6,000,000 = 6 Inventory Turns
 Inventory turnover ratio uses the cost of items (what you paid for them) not sales dollars (what you sold them for).
To calculate the average inventory, record your inventory level at the beginning and midway through the month (some companies do this daily). However, many companies only capture the month ending inventory. It is important to use the same costing for the Cost of Sales and the Average Inventory. This is because you want an "apples to apples" comparison when it comes to the cost.

Back to our inventory turnover example above: 6 Inventory this a poor performing company or is it world class? That depends on the industry. Grocery chains have a much higher inventory turnover ratio since they are selling products that is perishable. Companies that manufacture heavy machinery, would have a much lower inventory turnover rate. You will probably want to benchmark your findings against like companies to see how you compare. An unfavorable Inventory Turnover Ratio may highlight an area to target for improvement.
Another way to view your inventory turns is to look at the Projected Inventory Turns. This is done by dividing the "Total Cost of 12 Month Sales Plan" by the "Total Cost of Goal Inventory"
Example: The Total Cost of 12 Month Sales Plan is $40,000,000. Total Cost of Goal Inventory = $8,000,000
            $40,000,000 / $8,000,000 = 5 Projected Turns
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