![]() ![]() X Expert Source Keila Hill-Trawick, CPAĬertified Public Accountant Expert Interview. A low inventory turnover isn't always bad and a high inventory turnover isn't always good. However, it's very important to remember that context is important in these sorts of comparisons. Because of this, a business's inventory turnover can be used to gain clues about how efficiently a business is operating, especially compared to competitors. Usually (though not always) businesses want to sell their inventory quickly, rather than slowly. Use your inventory turnover as an approximate measure of efficiency. In this case, our average inventory is ($20,000 + $30,000 + $40,000)/3 = $30,000 - a little higher (and more representative of the actual average) than before. For instance, let's say we also use a point from the exact middle of the year with a value of $40,000. However, just one additional data point can give us a different picture. Using the basic method above, we would get an average value of $25,000. Let's say that our starting inventory for a year of operating our business is $20,000 and that our ending inventory is $30,000.Instead, use one point from the first of each month. For instance, if you're finding average inventory for a year, don't use twelve points from January. When choosing data points, make sure your points are evenly-spaced throughout the time period at regular intervals.Using additional data points will make your value more accurate. As noted above, finding your average inventory from your beginning and end inventory values can get you an approximate average for your inventory, but this value will not take into account inventory fluctuations throughout your time period. ![]() Use multiple inventory data points for a more accurate answer. This quantity is a ratio and has no units. In our example, COGS is $5 million and average inventory is $0.4 million, so our inventory turnover for the year is $5 million/$0.4 million = 12.5.
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