A measure of the capital efficiency of an operation. One turn equals to the complete consumption and replenishment of the inventory in question. The number of inventory turns is usually based on a calendar year. Turns is just a ratio of consumption vs. on hand.
Inventory Turns = | Annualized Cost of Goods Sold($) / Average Inventory ($), and sometimes |
Annual Cost of Goods Sold($) / Current Stock on Hand Value($) | |
also | 365 / Inventory Days of Supply |
365 / Inventory $/ Daily Sales $ | |
Throughput Rate / Inventory |
Example: Say your yearly sales at cost was $5million and your average inventory was $500,000, then you would have 10 turns.
One way to determine Average Inventory is to take (Beginning Inventory + Ending Inventory)/2, where the beginning and ending period could be last year, rolling 12 months, or just last month.
What's a good number of turns? Well that depends. The better question might be what do we need to do to be more efficient with our inventory and turn faster than we do today? For industry benchmarks try BizStats.com. But be careful the Inventory Turnover Ratio available here and at Dun & Bradstreet will usually use total sales in the numerator. Companies don't usually publish their actual costs. Also cost of sales is often manipulated, while actual sales is usually a purer number.
Related post: Days Inventory on Hand
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