What is inventory turnover and how is it calculated?
Turnover measures the number of times you use or sell your average investment in inventory. It is calculated by dividing annualized cost of goods sold of inventory (i.e., what you paid for the material you sell) by your average investment in stock inventory (i.e., what you paid for the material in stock in your warehouse or store). For example, if your annual cost of goods sold is $6 million and your average inventory investment is $1 million, you would achieve six inventory turns. Keep in mind that every time you turn your inventory you have an opportunity to earn a profit. So, if you achieve six inventory turns, you experience six opportunities to earn a profit from every dollar invested in inventory. What is wrong with basing performance evaluation solely on turnover? Turnover measures opportunities to earn a profit, not actual profitability. Gross margin is a common measurement of profitability. It is calculated with the formula: (Sales $ – Cost of Goods $) รท Sales $ Some businesse
