Michael R. Lewis is a former corporate executive, entrepreneur, and investment advisor based in Texas. He has worked in business and finance for over 40 years.
Number of sources used in this article: . You will find a list of them at the bottom of the page.
For a company that sells products, it is very important to be able to manage inventory in order to make a profit from its activities. Calculating the period of inventory turnover allows you to understand how well the company is doing in terms of inventory. Having this information, you can compare your company's inventory turnover period with that of your competitors. A shorter inventory turnover period will indicate higher inventory turnover and a better return on assets. The calculation of the period of inventory turnover requires knowledge of the cost of goods sold for the period and the average cost of inventory for this period. In order to calculate the inventory turnover period in days, you will first need to calculate the inventory turnover ratio, for which you will need the above cost and the average cost of the company's inventory.
Steps
Part 1
Calculation of inventory turnover ratio- The cost of sales is reflected in the income statement. financial results. It is the value subtracted from the revenue and gives the gross margin.
- In a trading company, the cost of sales can be simplified as follows: Cost of sales = Inventory value at the beginning of the period + Purchase of inventory during the period - Inventory value at the end of the period
- For example, consider a period of 12 months, at the beginning of which the company had inventories of 9,000,000 rubles, during the period goods were purchased for 20,000,000 rubles, and at the end of the period the inventory was 3,000,000 rubles.
- A simplified cost estimate would look like this: 9,000,000 + 20,000,000 - 3,000,000 = 26,000,000 (rubles) .
- The resulting value of 26,000,000 rubles will be indicated in the income statement under the cost of sales line.
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Determine the average value of the company's inventory for the period. The average value of inventory for the reporting period is determined by the formula for calculating a simple average. The value of a company's inventory can vary significantly during an accounting period. That is why in order to calculate financial indicators turnover, it makes sense to use its average value. The average value avoids inaccuracies due to sharp fluctuations in inventory levels.
- Average inventory value for the period: (Inventory at the beginning of the period + Inventory at the end of the period) / 2.
- For example, in the reporting year, the company had inventories in the amount of 9,000,000 rubles at the beginning of the year, and 3,000,000 rubles at the end of the year.
- The average cost of inventory for the year will be as follows: (9,000,000 + 3,000,000 / 2 = 6,000,000 (rubles) .
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Use the formula for calculating the inventory turnover ratio. Knowing the cost of sales and the average cost of inventory for the period, you can calculate the inventory turnover ratio. It is clear from the above examples that for the 12-month period under consideration, the cost of sales was 26,000,000 rubles, and the average cost of inventory was 6,000,000 rubles. To calculate the inventory turnover ratio, it will be necessary to divide the cost price by the average inventory value.
- 26 000 000 / 6 000 000 = 4,33
- That is this company uses and replenishes its reserves 4.33 times per year.
Get to know the concept of inventory turnover ratio. Inventory turnover refers to the number of times a company uses and replenishes its inventory in a given period of time. A low turnover ratio suggests that the company's assets are used inefficiently and yield low profits. In such a situation, the company holds too much inventory because it does not have time to use them quickly enough. A high turnover ratio can be an indicator that a company is missing out on upselling opportunities when a customer wants to purchase an item but the company doesn't have enough inventory to produce and sell it.
Determine the cost of goods sold. Cost of goods sold represents the direct costs incurred to produce a product or provide a service. In the service sector, the cost includes personnel costs, including wages, premiums, taxes. In retail or wholesale trade, the cost price includes the cost of purchasing goods from the manufacturer, as well as the costs incurred in connection with the acquisition of goods, their storage and display on store shelves.
Part 2
Calculation of inventory turnover period-
Get to know the meaning of the concept of the period of inventory turnover. Once you know the value of the inventory turnover ratio, you can use it to calculate the inventory turnover period in days. The inventory turnover period tells you how many days it takes for a company to fully sell its inventory. This indicator also indicates how many days the available stocks will be enough. Companies use this indicator to evaluate their effectiveness in terms of inventory utilization.
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Use the formula for calculating inventory turnover period. The inventory turnover period is determined by dividing the number of days in the analyzed period by the inventory turnover ratio for that period. In the example above, the turnover ratio was 4.33. Since in this example a period of 12 months was used, the total number of days in the period will be 365.
- The inventory turnover period will be calculated as follows: 365 / 4.33 = 84.2 (days).
- This suggests that it takes the company 84.2 days to fully sell its average inventory.
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Apply an alternative calculation formula. If you have not previously calculated the inventory turnover ratio, you can directly use cost of sales and average inventory value to calculate the inventory turnover period. You will need to divide the average inventory value by the cost of sales for the period. Then the resulting number must be multiplied by the number of days in the analyzed period.
- In the above examples, the average inventory value is 6,000,000 rubles, the cost of sales is 26,000,000 rubles, and the analyzed period is 365 days.
- The inventory turnover calculation would look like this: (6 000 000 / 26 000 000) * 365 = 84,2
- Got the same value. It takes the company 84.2 days to fully sell its average inventory.
The inventory turnover ratio is an efficiency ratio that measures how efficiently inventory is being carried out by comparing the cost of goods sold with the average number of inventory for certain period. In other words, it measures how many times a company has sold in a year.
This ratio is important because the total turnover depends on two main components of activity. The first component is purchase of shares. If a company has large volumes of inventory acquired during the year, then it will have to sell more goods to improve its turnover. If the company cannot sell more inventory, it will incur storage and other costs.
The second component is sales. Sales must match inventory purchases, otherwise inventory will not be effective. This is why the purchasing and sales departments need to work closely with each other.
Definition
Inventory turnover is a value that determines how many times a company's inventory is sold and replaced over a given period of time. To find out how many days it takes to sell equipment, you need to divide the sales volume by the average inventory value.
Inventory turnover ratios depend on the company as well as development industries. Low-margin industries tend to have higher inventory turnover ratios as profit margins are offset by high sales forecasts.
For all these reasons, comparisons of inventory turnover ratios are usually most appropriate among firms within the same industry, and the definition of "high" or "low" ratio must be made in this context.
Inventory turnover measures how quickly a company sells products and typically compares this to industry averages. Low turnover suggests weak sales and therefore excess inventory. A high ratio implies strong sales and/or large discounts.
The speed at which a company can sell is a key measure of business performance. It is also one of the components of the calculation of return on assets. As such, high turnover means nothing if the company is not making a profit on every sale.
Calculation and formula
The formula for calculating inventory turnover is as follows:
Kob.z. = TC / Mc.r., where
Kob.z.- inventory turnover ratio, TS- cost of goods sold Mc.r. – average annual cost stocks.
Inventory turnover is calculated as sales divided by average inventory. Average stocks are calculated as:
(quantity at the beginning of the inventory + ending stocks) / 2
Analysts divide the amount of average inventory instead of inventory sold for greater accuracy in the turnover calculation, since sales include a markup on cost.
In the framework of accounting, this ratio is calculated as follows:
Kob.z. = row 2110 / average of row 1210
In general, low inventory turnover rates indicate that a company has too much inventory, which may be indicative of poor management or low sales. Excess inventories tie up a company's cash and make the company vulnerable if market prices fall. Conversely, high inventory turnover rates may indicate large sales and well-timed inventory counts.
High inventory turnover also means the company replenishes stock quickly Money. Exceptionally high inventory turnover may indicate that a company frequently makes inefficient purchases and therefore loses some sales.
It is important to understand that the timing of the purchase of inventory, especially the one made in preparation for special promotions, may slightly change the turnover.
Various accounting methods also affect the inventory turnover ratio. During periods of rising prices, using the LIFO method, the turnover indicates a higher cost of sales and low inventory than using the LIFO method.
In addition, companies using the LIFO method also have more stock than FIFO companies. The LIFO method increases the cost of production, which reduces profits and, in turn, reduces tax liabilities. The cost of goods sold is reflected in income.
The average inventory can be defined as follows:
TZav. = (ТЗ1 + ТЗ2 + ... + ТЗn) / n-1, where
TKn- the value of the inventory on certain dates of the analyzed period (rubles, dollars, etc.), n is the number of dates in the period.
Turnover in days:
Obdn \u003d (TZav * Number of days) / T, where
TZav- average inventory T- turnover for a given period or sales volume.
The turnover in times is determined using the following formulas:
Image = Number of days / Days
Image \u003d Turnover (T) / Average inventory (TZav)
Product inventory level:
Uz \u003d (Commodity stock at the end of the analyzed period (TK) * Number of days (D)) / Turnover for the period
The turnover rate is the expected number of turnovers of goods for a certain period of time. Defined as follows:
Turnover rate = 12 / (f * (OF + 0.2 *L)), where
OF is the average order frequency per month, L is the average delivery period in months, f is a coefficient generalizing the effect of other factors that may affect the turnover.
Analysis
Inventory turnover is a measure of how effectively a company can control the sale of its product.
falls, That
- An increase in the amount of assets used is possible.
- There may be a drop in sales.
If the turnover ratio growing, That
- Capital turns around faster, each unit of inventory brings more profit.
- It can be artificially high when switching to a leased OS.
The higher the inventory turnover of a company, the more efficient production is and the less the need for working capital for its organization.
The webinar on determining turnover is presented below.
If there is a product, then this is certainly good, but only as long as it does not become too much. The warehouse is full of goods - we pay taxes on stocks, but it is sold too slowly. Then we say - the turnover of goods is low. But if it is very high, it means that the product is being sold quickly, too quickly. Then the buyer, having come to us, runs the risk of not finding desired product. The answer lies in the ability to analyze and plan inventory turnover.
Concepts with which we operate
Each manager operates with terms such as "inventory", "turnover", "leaving", "turnover", "turnover ratio", etc. However, when using economic and mathematical methods of analysis, confusion often arises in these concepts. As you know, the exact sciences require precise definitions. Let's try to understand the terminology before we consider the concept of turnover in detail.
GOODS - products that are sold and bought; it is part of the inventory. A service can also be a product if we require money from our buyer for it (delivery, packaging, payment mobile communications by cards, etc.).
INVENTORIES is a list of assets (goods, services) of a company suitable for sale. If you are a retailer and wholesale trade, then your inventory is not only the products on the shelves, but also the goods that are in stock, delivered, stored or received - everything that is up for sale.
If we are talking about INVENTORY, then it is goods in transit, goods in stock and goods receivable (because you retain ownership of it until it is paid for by the buyer, and theoretically you can return it to to your warehouse for later sale). BUT: to calculate the turnover, goods in transit and goods in receivables are not taken into account - only the goods present in our warehouse are important to us.
AVERAGE COMMODITY STOCK (ТЗav) - the value that we need for our own analysis. TZav for the period is calculated by formula 1.
Example
The calculation of the average commodity stock (ТЗav) for the year for a company trading, for example, in small household chemicals and household goods, is given in Table. 1.
The average TK for 12 months will be $51,066.
There is also a simplified formula for calculating average balances:
TZav" = (balances at the beginning of the period + balances at the end of the period) / 2.
In the above example, TZav" will be equal to (45,880 + 53,878) / 2 = $ 49,879. However, when calculating the turnover, it is still better to use the first formula (it is also called the average chronological moment series) - it is more accurate.
TABLE 1. Calculation of the average inventory
COMMODITY TURNOVER (T) - the volume of sales of goods and the provision of services in monetary terms for a certain period of time. The turnover is calculated in purchase prices or cost prices. For example, we say: "The turnover of the store in December amounted to 40,000 rubles." This means that in December we sold goods worth 39,000 rubles and also provided home delivery services for our customers worth 1,000 rubles.
turnover and turnover ratio
The financial success of the company, the indicator of its liquidity and solvency directly depends on how quickly the funds invested in stocks turn into real money.
As an indicator of the liquidity of stocks, the INVENTORY TURNOVER RATIO is used, which is most often referred to simply as turnover.
This coefficient can be calculated according to different parameters (by cost, by quantity) and for different periods (month, year), for one product or for categories.
There are several types of inventory turnover:
- the turnover of each item of goods in quantitative terms (by pieces, by volume, by weight, etc.);
- turnover of each item of goods by value;
- turnover of a set of items or the entire stock in quantitative terms;
- turnover of a set of items or the entire inventory by value.
For us, two indicators will be relevant - the turnover in days, as well as the number of revolutions of the goods.
INVENTORY TURNOVER (RO) or INVENTORY TURNOVER SPEED. The speed with which the product turns around (that is, it comes to the warehouse and leaves it) is an indicator that characterizes the effectiveness of the interaction between purchases and sales. There is also the term "COMMODITY TURNOVER", which in this case is one and the same.
The turnover is calculated according to the classical formula:
(Balance of goods at the beginning of the month)/(Turnover for the month)
But for increased accuracy and correct calculation, instead of the balance of goods at the beginning of the period, we will use the average inventory (TSav)
Let's note THREE IMPORTANT POINTS before proceeding to the calculation of turnover.
1. If the company does not have stocks, then it makes no sense to calculate the turnover: for example, we trade in services (we maintain a beauty salon or give consultations to the public) or we deliver to the buyer from the supplier’s warehouse, bypassing our own warehouse (for example, an online bookstore).
2. If we unexpectedly implemented some major project and sold an unusually large batch of goods under the order of the buyer. For example, a company won a tender to supply finishing materials in a building nearby shopping mall and under this project brought to the warehouse a large batch of plumbing. In this case, the goods delivered under this project should not be taken into account, since it was the target delivery of goods already sold in advance.
In both cases, the store or company makes a profit, but the inventory in the warehouse remains intact.
In fact, we are only interested in LIVE STOCK - this is the amount of goods that:
- came to the warehouse or was sold for the period under review (that is, any of its movements); if there was no movement (for example, elite cognac was not sold for a whole month), then it is necessary to enlarge the analysis period for this product;
- and also this is the quantity of goods for which there was no movement, but the goods were on the balance (including those with a negative balance).
If there was a zeroing of goods in the warehouse, then these days must be deleted from the turnover analysis.
3. All calculations on turnover must be carried out in purchase prices. The turnover is considered not at the selling price, but at the price of the purchased goods.
Formulas for calculating turnover
1. DAY TURNOVER - the number of days required to sell existing inventory (see formula 2).
Sometimes it is also called the average shelf life of goods in days. This way you can find out how many days it takes to sell an average inventory.
Example
The heading "Hand cream" is analyzed, as an example in Table. 2 shows data on sales and stocks for half a year.
Calculate the turnover in days (how many days we sell the average stock of goods). The average stock of cream is 328 pieces, the number of days on sale is 180, the sales volume for half a year was 1701 pieces.
Obdn = 328 pcs. (180 days / 1701 pieces = 34.71 days
The average supply of cream turns around in 34-35 days.
TABLE 2. Sales and inventory data for the "Hand cream" item
2. TURNOVER IN TIMES - how many revolutions does the product make per period (see formula 3).
The higher the company's inventory turnover, the more efficient its activities, the less the need for working capital and the more stable financial position enterprises, other things being equal.
Example
Let's calculate the turnover in turnover (how many times the stock is sold for six months) for the same cream.
1st option: Image = 180 days. / 34.71 = 5.19 times.
2nd option: Image = 1701 pcs. / 328 pcs. = 5.19 times.
The stock turns over an average of 5 times per six months.
3. PRODUCT INVENTORY LEVEL (UTZ) - an indicator that characterizes the supply of the store with stocks on a certain date, in other words, for how many days of trade (with the current turnover) this stock will last (see formula 4).
Example
How many days will our existing supply of cream last?
Utz = 243 pcs. (180 days / 1701 pieces = 25.71.
For 25–26 days.
You can calculate the turnover not in pieces or other units, but in rubles or another currency, that is, by cost. But the final data will still be correlated with each other (the difference will be only due to rounding of numbers) - see table. 3.
TABLE 3
What gives turnover?
The main purpose of inventory turnover analysis is to identify those goods for which the cycle rate "goods-money-goods" is minimal in order to decide on their future fate.
To illustrate, consider an example of the analysis of the turnover ratio of two products - bread and cognac, which are part of the assortment grocery store(see tables 4 and 5).
TABLE 4. Analysis of the turnover ratio of two goods
This table shows that bread and expensive cognac have completely different indicators - the turnover of bread is many times higher than cognac. But it is illegal to compare products from different product categories - such a comparison does not give us anything. Obviously, bread has one task in the store, while cognac has a completely different one, and it is possible that the store earns more from one bottle of cognac than from sales of bread in a week.
TABLE 5. Analysis of the turnover ratio of four products
Therefore, we will compare products within the category with each other - bread is comparable with other bread products (but not with cookies!), And cognac - with other elite alcoholic products (but not with beer!). Then we can draw conclusions about the turnover of a product within a category and compare it with other products with similar properties.
Comparing products within a category, we can conclude that tequila has a longer turnover period than the same brandy, and the turnover rate is lower, and that whiskey in the category of elite alcoholic beverages has the highest turnover, while vodka (despite the fact that its sales are twice as high as those of tequila) this indicator is lower, which, apparently, requires adjustment of the warehouse stock - it is possible that vodka should be imported more often, but in smaller batches.
In addition, it is important to track the dynamics of changes in turnover in turnover (Rev) - to compare with the previous period, with the same period last year: a decrease in turnover may indicate either a drop in demand, or an accumulation of poor quality goods or outdated samples.
The turnover itself does not mean anything - you need to track the dynamics of the change in the coefficient (Rev), taking into account the following factors:
- the coefficient decreases - the warehouse is overstocked;
- the coefficient is growing or very high (shelf life is less than one day) - work "from wheels", which is fraught with a lack of goods in the warehouse.
In conditions of constant shortages, the average value of the warehouse stock can be equal to zero - for example, if demand is growing all the time, but we do not have time to bring the goods and sell them "from the wheels". In this case, it makes no sense to calculate the turnover ratio in days - perhaps it should be calculated in hours or, conversely, in weeks.
If a company is forced to store in a warehouse goods of irregular demand, goods with a strongly pronounced seasonality, then achieving a high turnover is not an easy task. To ensure customer satisfaction, we will be forced to have a wide range of infrequently sold items, which will slow down the overall inventory turnover. Therefore, the calculation of turnover for all stocks in the company is incorrect. It will be correct to count by categories and by goods within categories (headings).
Also for the store, the conditions for the delivery of goods play an important role: if the purchase of goods is made using its own funds, then the turnover is very important and indicative; if on credit own funds you invest to a lesser extent or do not invest at all, then the low turnover of goods is not critical - the main thing is that the loan repayment period does not exceed the turnover rate. If the goods are taken mainly on the terms of sale, then first of all it is necessary to proceed from the volume of storage facilities, and the turnover for such a store is the last indicator in importance.
Turnover and withdrawal
It is important not to confuse the two concepts - turnover and withdrawal.
TURNOVER - this is the number of turnovers of goods for the period.
LEAVAGE - an indicator that indicates how many days the goods leave the warehouse. If in the calculation we do not operate with an average TK, but calculate the turnover of one batch, then we are really talking about leaving.
Example
On March 1, a batch of 1000 pencils arrived at the warehouse. On March 31, there are no pencils left in the warehouse (0). Sales are 1000 pieces. It seems that the turnover is 1, that is, this stock turned around once a month. But it is necessary to understand that in this case we are talking about one batch and the time of its implementation. One batch does not turn around in a month, it "leaves".
If we calculate the average stock, it turns out that on average there were 500 pieces in stock per month.
1000 / ((1000 + 0) / 2) = 2, that is, it turns out that the turnover of the average stock (500 pieces) will be equal to two periods. That is, if we brought two batches of pencils of 500 pieces, then each batch would be sold in 15 days. In this case, it is incorrect to calculate the turnover, because we are talking about about one batch and does not take into account the period when the pencils were sold to zero balance - perhaps this happened in the middle of the month.
Batch accounting is not needed to calculate the inventory turnover ratio. There is an inflow of goods and an outflow of goods. Given a period (for example, 1 month), we can calculate the average inventory for the period and divide the sales volume by that.
Turnover rate
Very often you can hear the question: "What are the turnover rates? What is the correct way?"
But companies always have the concept of "RETURN RATE" and each company has its own.
RATE OF TURNOVER - this is the number of days (or turnovers) for which, in the opinion of the company's management, a stock of goods must be sold in order for the trade to be considered successful.
Each industry has its own standards. Some companies have different standards for different product groups. So, for example, our trade company used the following rates (turns per year):
- building chemistry - 24;
- varnishes, paints - 12;
- plumbing - 12;
- facing panels - 10;
- rolled floor coverings - 8;
- ceramic tiles - 8.
In one of the chain supermarkets, the turnover rate for a non-food group is divided on the basis of ABC analysis: for goods A - 10 days, for goods of group B - 20 days, for C - 30. In this retail network the monthly turnover is included in the inventory indicator, and the inventory balance in the store is the sum of the turnover rate plus the safety stock.
Also, some experts financial analysis use Western standards.
Example
“Usually, traders in industrial goods at Western enterprises have a turnover ratio of 6 if the profitability is 20–30%,” writes Dobronravin E. in the article “Turnover ratio and service level - indicators of inventory efficiency.” – If the profitability is 15%, the number of revolutions approximately 8. If the profitability is 40%, then a solid profit can be obtained with 3 rotations per year.However, as noted earlier, it does not follow that if 6 rotations are good, then 8 or 10 rotations are better.These data are indicative when planning summarizing indicators.
Henry Assel, in Marketing: Principles and Strategy, writes: "In order for businesses to operate at a profit, their inventory must turn 25 to 30 times a year."
An interesting method for calculating the turnover rate is offered by Dobronravin E. He uses a Western development that takes into account many variable factors: the frequency with which goods are ordered, transportation time, delivery reliability, minimum dimensions order, the need to store certain volumes, etc.
What is the optimal number of inventory turnovers that can be included in the plan specific enterprise? Charles Bodenstab analyzed a large number of companies using one of the SIC systems in inventory management. The results of the empirical study were summarized in formula 5.
f in the proposed formula is a coefficient that summarizes the effect of other factors affecting the theoretical number of revolutions. These factors are:
- the width of the assortment in storage, that is, the need to store slow-moving stocks for marketing purposes;
- larger than required purchases in order to obtain volume discounts;
- requirements for a minimum purchase lot from a supplier;
- supplier unreliability;
- economic order quantity (EOQ) policy factors;
- overstocking for promotion purposes (promotion of goods);
- use of delivery in two or more stages.
Example
The store has factors (they are indicated in Table 6) applied to different suppliers.
You can give several examples of how the turnover rate will look like with the applied formula (see Table 7).
TABLE 6. Shop factors for vendors
This means that if, on average, we import goods 3 twice a month (0.5) and we carry it for 1 month, despite the fact that some factors (perhaps the supplier is unreliable) are not ideal, then the turnover rate can be considered 9.52. And for product 5, which we rarely import (it takes a long time, and the influencing factors are very far from ideal), it is better to set a turnover rate of 1.67 and not demand too much from its sale.
TABLE 7. Calculation of the turnover rate
But practice Western companies very different from Russian conditions- too much depends on logistics, purchase volumes and delivery times, supplier reliability, market growth and demand for goods. If all suppliers are local and the turnover is high, then the coefficients can reach 30-40 turnovers per year. If supplies are intermittent, the supplier is unreliable and, as often happens, demand fluctuates, then for a similar product in a distant region of Russia, the turnover will be 10-12 turnovers per year, and this is normal
Turnover rates will be higher for small enterprises working for the end consumer, and much less for enterprises producing group A products (means of production) due to the length of the production cycle.
Again, there is a danger of rough compliance: for example, you do not fit into the turnover ratio and start to reduce the safety stock. As a result, there are gaps in the warehouse, there is a shortage of goods and unsatisfied demand. Or you start to reduce the size of the order - as a result, the costs of ordering, transporting and processing goods increase. Turnover increases, but availability problems remain.
The norm is a general indicator, and one should react and take action as soon as some negative trend is detected: for example, inventory growth outpaces sales growth, and at the same time as sales growth, inventory turnover has decreased.
Then you need to evaluate all marketable goods within the category (perhaps some individual items are purchased in excess) and make informed decisions: look for new suppliers that can provide more short time supply, or stimulate sales for this type of product, or give it a priority place in the hall, or train sellers to advise buyers on this particular product, or replace it with another more well-known brand, etc.
DEFINITION
Turnover ratio represents the main value determined in the process of planning the desired amount of stocks. By means of this indicator, the number of turnovers of stocks for any period of time is determined.
The inventory turnover formula reflects the efficiency of using stocks in the process of making a profit from the main activities of the enterprise.
The turnover rate is a relative value, it can be used to compare different periods. The inventory turnover formula determines the number of revolutions made by stocks during the business process.
When calculating the turnover rate, there are 2 formulas for which three values are needed:
- Net sales (revenue),
- cost of goods sold,
- Inventory cost (for example, annual average if annual inventory turnover is calculated).
Inventory turnover formula
The inventory turnover formula is calculated as the ratio of income to the amount of inventory. The value of turnover is measured in the number of revolutions for the corresponding period of time.
The inventory turnover formula is as follows:
Cob. app. = OR / Czap,
OR - sales volume (rub.);
Inventory turnover formula through cost price
Many enterprises determine inventory turnover through the cost of production, while the inventory turnover formula takes the following form:
Cob. app. = Seb / Czap,
Here To ob.zap. — inventory turnover ratio;
Seb - cost of goods sold (rubles);
Czap. - the average value of reserves (rubles).
The average inventory value can be determined by adding the sum of inventories at the beginning and end of the period (for example, a year) and dividing this amount by 2.
In our country, there is a great advantage this method inventory turnover calculation than revenue calculation.
Indicator standard
For the indicator of inventory turnover, there is no normative value adopted for all enterprises. These values are best calculated and compared for enterprises in the same industry, and better in dynamics for one specific organization.
If there is a decrease in the inventory turnover ratio, this may indicate the following facts:
- Excess inventory accumulated
- Low efficiency of warehouse management,
- A lot of unusable material has been accumulated, etc.
High turnover also does not always show efficient work company, as it can be an indicator of low inventory levels, which most often leads to interruptions in the production process.
For companies operating with high profitability, low turnover is typical, and for those operating with a low rate of return, the opposite is true.
Examples of problem solving
EXAMPLE 1
| Exercise | The company has an average material stock of 1600 pieces, last month it was 1250 pieces, while 12,000 pieces were sold this month and 20,000 pieces last month. Determine the turnover of goods in days, if this month has 31 days, last 30 days. Compare the two months and draw a conclusion. |
| Solution | SZ1 \u003d 1600 * 31 / 1200 \u003d 41.3 days SZ2 \u003d 1250 * 30 / 2000 \u003d 18.8 days Conclusion. We can see that it takes an average of 41 days for a company to sell an average inventory of a product this month. In the past, this figure was about 19 days. This is a signal that a reduction in the amount of imported material or an increase in sales is necessary. Material this month began to turn around more slowly than last. |
| Answer | 41.3 days, 18.8 days. |
An important analytical indicator that characterizes how efficiently the company's resources are used is the inventory turnover ratio. The calculation of this indicator is based on the information provided in financial statements company or entrepreneur.
What is turnover and inventory turnover ratio in particular?
Turnover determines a specific period of time during which any object (goods, money, stocks, raw materials) carries out full circulation. Also, turnover can mean the number of these calls for a certain time interval.
Inventory turnover means the rate of renewal of resources, raw materials, materials and stocks of the company during a certain period of time. This information is extremely important not only for analysts, but also for the supply department, which, based on calculations, determines the organization's resource needs. In this case, the inventory turnover ratio shows how many times the raw material goes through the cycle in a specific period of time.
The inventory turnover ratio can be considered and analyzed only by comparing the values in different periods of time and comparing them with the average indicators of the industry and other enterprises, which will determine its dynamics. Accordingly, if He increases over time, its dynamics is positive, we can talk about the high efficiency of the use of raw materials.
Inventory turnover ratio: calculation data, formula
To calculate the inventory turnover ratio, information from financial statements is taken as the basis. The main data provider is the income statement.
The inventory turnover ratio can be calculated in two ways, the difference between which lies in what exactly is taken as a basis:
- The first approach is focused on Western economic models. When calculating, experts start from the amount of the company's revenue. In this case, the inventory turnover ratio will be calculated using the following formula:
- K volume = Revenue / Average inventory
Let's imagine the same formula for calculation using the income statement information:
- To volume = Str.2110 / Str.1210
- The second method of calculation is more focused on Russian realities and is based on the cost of goods sold by the company. Inventory turnover ratio - formula:
- To ob-ty \u003d Cost price goods sold/ Average inventory.
In this case, using the indicators of the financial results report, the formula will take the following form:
- To about-ti = Str.2120 / Str.1210.
It is obvious that the above formulas for calculation differ only in the indicator reflected in the numerator. Whereas the denominator in both cases indicates the average amount of stocks of the organization.
You can determine the value of this indicator using the following formula:
- Average inventory = (Sum of inventory at the beginning of the period + Sum of inventory at the end of the period) / 2.
Let's imagine the indicated formula with the indicators involved from the accounting report:
- Average inventory = (Line 1210 at the beginning of the period + Line 1210 at the end of the period) / 2
The value of the inventory turnover ratio obtained during the calculation is measured in turnover, that is, the number of cycles that the inventory has gone through in the organization. At the same time, a higher value of the inventory turnover ratio corresponds to a higher efficiency in the use of resources by the company.
