How to Calculate Inventory Turnover Ratio

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HOW TO CALCULATE
INVENTORY TURNOVER RATIO
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Inventory turnover ratio helps you in
evaluating HOW WELL THE MANAGEMENT
IS WORKING in managing the inventory and
generating sales from it
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It is the measure of HOW QUICKLY YOUR
BUSINESS SELLS through its inventory in a
given period of time and needs to replace it
again
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Inventory turnover is a financial
ratio which depends on
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Cost of Goods Sold (COGS)
Average Inventory
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CALCULATING THE
FINANCIAL RATIO
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Deciding the Inventory
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Turnover Period
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The time period can range from one single
day or an entire year or it can be a
particular week. We cannot CALCULATE
INVENTORY TURNOVER AT A PARTICULAR
INSTANT
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Calculating the Cost of Goods
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Sold( COGS)
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Cost of goods sold is the direct total
expense associated with the production of
goods sold or the cost of the goods you
ACQUIRE TO SELL TO THE CUSTOMERS
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Finding Average inventory
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Calculating average inventory is simple, add
the starting INVENTORY AND ENDING
INVENTORY TOGETHER
Divide the sum by 2
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Apply the Inventory Turnover
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Formula
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APPLICATION AND
INTERPRETATION OF INVENTORY TURNOVER IN YOUR
BUSINESS
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Using Inventory Turnover to Calculate
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Average Days to Sell a Product
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Inventory turnover period in simple words
is also known as the AVERAGE NUMBER OF
DAYS REQUIRED TO SELL A PRODUCT
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The Ideal Inventory Turnover
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Ratio
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Low inventory turnover indicates that
the companys goods are spending a lot of time
being stored in the warehouse
High inventory turnover indicates fast
moving inventories and efficient operations
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Consider Ideal Turnover
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According to the Product Type
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Items with high turnover are good because
there are MANY PRODUCTS THAT TEND TO
EXPIRE SOON or get out of season quickly
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Very High Inventory Turnover is
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Also not Good
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Usually HIGH INVENTORY TURNOVER
INDICATES HIGH SALES. But at times that is
not true, especially for non-perishable
goods
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CONCLUSION
As per the product, you need to keep inventory
turnover in check so as to match demand and
supply.
Optimal Inventory Turnover Ratio varies from
company to company and thus cannot be
generalized
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