Despite 58% of UK small business owners anticipating growth in the year ahead – many are unsure where this will come from. In business, while a positive outlook will get you so far, practical solutions are what can really make the difference.
Staying on top of your stock and measuring inventory turnover may not be the most thrilling of tasks, but it is a crucial part of running a business, and can help shop owners save money by avoiding the purchase of unnecessary stock, and staying abreast with what to invest in to boost sales and ultimately grow. As a metric alone, it's a useful tool in helping small businesses measure the rate at which they get through stock, and how often they need to restock and rotate their inventory to keep things fresh depending on the season.
Regularly calculating and staying on top of your inventory turnover can help you keep an eye on your bestsellers, as well as which products aren't so popular with your customers, which in turn can help you make more informed decisions when it comes to your next stock-up, as well as your pricing decisions. In this guide, we’ll explain how to calculate stock turn and offer some tips for improving it.
How to Calculate Stock Turnover
- How to calculate cost of goods sold (COGS)
- How to calculate average inventory
- How to calculate stock turn
- Determine the time period
- FAQs
- Tips for improving stock turn
1. How to calculate cost of goods sold (COGS)
To put it simply, the cost of goods sold is the total cost of the inventory that was sold during the time period you are measuring. To calculate COGS, you need to add up the cost of all the inventory you sold during that time period.
COGS = Beginning Inventory + Purchases - Ending Inventory
Beginning inventory is the inventory you had at the start of the time period you are measuring. Purchases here means the inventory you bought during that time period. Ending inventory is the inventory you had at the end of that time period.
For example, let’s say your beginning inventory was £10,000, your purchases were £50,000, and your ending inventory was £15,000. Your COGS would be:
COGS = £10,000 + £50,000 - £15,000
COGS = £45,000
2. How to calculate average inventory
Your average inventory is the average amount of inventory you had on hand during the time period you are measuring. To calculate the average inventory, you need to add up the beginning and ending inventory for the period and divide by two.
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
For example, if your beginning inventory was £10,000 and your ending inventory was £15,000, your average inventory would be:
Average Inventory = (£10,000 + £15,000) / 2
Average Inventory = £12,500
3. How to calculate stock turn
Once you have calculated your COGS and average inventory, you can calculate your stock turn.
Stock Turn = COGS / Average Inventory
For example, if your COGS was £45,000 and your average inventory was £12,500, your stock turn would be:
Stock Turn = £45,000 / £12,500
Stock Turn = 3.6
This means that you turned over your inventory 3.6 times during the time period you measured. In other words, you sold and replaced your entire inventory 3.6 times.
4. Determine the time period
When calculating stock turn, be sure to determine which time period you want to measure. Most businesses measure stock turn on an annual basis, but if margins and budgets are tight, or you simply prefer to keep a closer eye on how your stock is performing, you can also measure it monthly, quarterly, or any other period that makes sense for your business.
For example, if you want to measure your stock turn on an annual basis, you would need to calculate the cost of goods sold (COGS) for the year and the average inventory for the year.
5. FAQs
Is turnover the same as revenue?
Revenue refers to the total amount of money a company makes from its business activities, which might be selling products or services. This figure represents the income a company earns before expenses are deducted. Essentially, it's the financial result of a company’s operations, often referred to as "sales" or "top-line" revenue.
On the other hand, turnover typically refers to how often a company uses or replaces certain assets in a given period. This can apply to different areas, such as inventory turnover, which measures how often a company sells and replaces its stock, or employee turnover, which tracks the rate which employees leave and are replaced. In financial terms, turnover can also describe how quickly a business "turns over" its assets to generate revenue. This is thought to reflect the efficiency with which it uses resources. The main difference here is that while revenue is a measure of income, turnover is more about the rate or efficiency of asset usage within a company.
What is a good stock turnover?
A healthy turnover ratio for most industries sits between 5 and 10, and indicates that a business is selling enough product to restock its inventory approximately every 1-2 months. This is considered a good stock turnover because it suggests a successful balance of having enough stock available for your customers to browse and buy, and not needing to reorder too often.
What is the ABC method of inventory?
The ABC method is just one of many ways you can organise and prioritise your inventory when it comes to a restock. This method separates inventory into three categories. “A” items are the most important and/or best-selling, and “C” items are the least important, or lesser selling items. Whether you go with ABC, 1:2:3, or your own unique variation, this is a great method to help you make decisions about which items to prioritise in terms of stock levels and reordering. If enough products consistently end up in your "C" or equivalent category, you may eventually consider swapping them out or replacing them, so this method can also be a great gauge of when and how to refresh parts of your inventory.
6. Tips for improving stock turn
Improving your stock turn process can help you free up cash and reduce the risk of old stock gathering dust on your shelves and taking up space you don't have, leaving you free to bring in the best and freshest new products for your customers.
The best ways to do this are to regularly monitor your inventory levels to avoid stockouts and overstocking, which can negatively impact your stock turn. Use historical data to forecast demand, analyse past sales data to help predict future demand, and plan your inventory levels accordingly. Optimise your ordering process, and consider implementing a just-in-time (JIT) inventory system by only ordering inventory when it is needed. Lastly, make the most of CREOATE's 60-day returns policy on any new brands you order from, to shift stock that won't sell, to save time and space on the shop floor.
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