![]() You can perform this calculation by using the average inventory cost formula: ![]() To find the average inventory for the fourth quarter, add these three values together and divide by the number of months. Let's say you have inventory at the end of October, November, and December of Rs. You can even adapt it for longer stretches, such as adding up monthly inventory over a year and dividing by 12, or for shorter periods, like a single month, by averaging the beginning and end-of-month inventories.Īverage Inventory = (current inventory + previous inventory) / total periods. This formula calculates the average inventory for two or more accounting periods. You'll need the average inventory again.ĭSI = average inventory / COGS (Cost of goods sold) X 365 days. The days' sales of inventory (DSI) measures how many days it takes to sell your inventory. Inventory turnover ratio = Cost of goods sold / average inventory To calculate the inventory turnover ratio, first find the average inventory and the cost of goods sold (COGS), which covers making your products, including materials and labor. However, it could suggest lost sales if you're not keeping enough inventory to meet demand.Ĭompare your ratio to similar companies' ratios to measure your performance.A higher ratio means you're restocking inventory and moving products. ![]() It also signals if you're holding onto excess stock. The inventory turnover ratio helps you see how much time passes between buying inventory and selling the final product to customers. It is calculated using the days' sales of inventory (DSI) and inventory turnover ratio. That's where average inventory helps it helps decide how much inventory you need to support sales and make maximum profits.Īverage inventory is also important for understanding how quickly you turn inventory into sales. You need a clear number when you're talking to suppliers for orders or deciding how much to order. Just looking at the overall stock won't show the true inventory status. Sometimes you receive a big shipment at the end of a month other times, you're stocking up for sale, or your business is tied to seasons, like selling ACs in summer or holiday items in winter. You can do the same analysis for a quarter, a year-to-date, or a month. It gives you an idea of how much stock you need on average each month to support those sales. Compare the revenue of your previous fiscal year with the average inventory during that time. This approach is used for other time frames, too. NOTE: When calculating the average inventory for a fiscal year, include the starting month you divide by 13 months instead of 12. For a yearly average, you would add up the inventory counts at the end of each month and then divide that by the number of months. The average inventory shows the average inventory value of the items over multiple accounting periods. For instance, you can compare it to total sales during the same period to track inventory losses caused by damage, shrinkage, and theft.
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