## What is an Inventory Turnover Calculator?

The cost of high inventory turnover can be devastating, especially for seasonal companies, said James Lamancuso, owner of Hello World, a lifestyle store in Philadelphia: “In my business, a huge part of my revenue comes from the holiday season. I need to make sure I have enough inventory in store. The only thing worse than a slow holiday season is a busy holiday season without inventory.”

• Lower inventory – or, per Lamancuso, no inventory at all – is a straight line to customer dissatisfaction
• It is also a straight line to increased expenses for the owner in the form of rush deliveries or backorders, ultimately driving up your cost of sales
• It can also cause a poor relationship between you and your suppliers
• Too-high cost of goods sold is a sign to potential lenders that you don’t have a grasp of your budget, and are therefore a risky borrower

## Strict organization is the foundation of inventory management

Heasun Choung is a supply chain expert with over 20 years in the industry; she’s worked for companies with diverse, complicated retail lines like Gillette and Proctor & Gamble. According to Choung, getting the right inventory turnover ratio comes down to forecasting: “You have to know your customers by tracking all purchases to effectively forecast what supplies and products you buy.” Choung emphasized that the ideal inventory turnover is selling your inventory with enough lead time to reorder it. Each industry has different inventory turnover ratios. A retail establishment most likely has a higher turnover rate (i.e. faster) than a used car dealership. However, forecasting, added Choung, should be done on a monthly basis, not just annually. “Your cost of goods sold should be calculated at least monthly,” she said.

## So, that inventory turnover calculator?

Here’s how to calculate inventory turnover by hand, so you know the logic behind the process. To get your turnover rate, take the total amount of sales and divide it by the value of your inventory. So if your denim company sold \$10,000 worth of jeans with a \$5,000 cost of raw materials/labor etc., then your inventory turnover is 2. Super straightforward. So now here’s how to calculate inventory turnover by letting a calculator do it for you. Most businesses calculate inventory turnover on a yearly basis, but you can really do it for any period of time. You can even calculate for a short time period (like a month) and then project that to an annual timeframe. Many small businesses don’t need to focus on inventory turnover as a priority, so doing it on an annual basis is all that is necessary, but several industries need to calculate more often. Lamancuso said about his seasonal business, “I’m a keystone operation. I try to maintain cost times 2 for my prices. If I plan on a revenue of \$100,000, I know it should cost me \$50,000, but I need to make sure I have enough inventory in store. . . I want to know how quick my turnover rate is, and the importance of that knowledge is amplified during the holiday season.”

## How can you track your inventory levels easily?

There are various options for business owners to track and manage a company’s inventory. There is generic inventory management software like Quickbooks, which tech-savvy owners can tailor to meet their industry needs. However, there are also options that are industry-specific. Restaurant365 and Toast help restaurant owners organize their hectic inventory turnover; Mindbody helps yoga studio and salon/spa owners do similar. These types of applications can help reduce product waste, as well as compare your current cash flow with your projected revenue. They can also let you know your total inventory value, and point out which items may not be high sellers. With software, you’ll be able to see exactly what sells the most, and set pricing at the point that will keep your stock turnover steady.

## Some inventory management words of wisdom

According to Tom Berrafato, the owner of a restaurant group outside of Buffalo, NY, as you mature as a small business owner, you should naturally get a better handle on your inventory turnover. “You have to be organized. I have been in the business for several decades, so I have my own system for inventory, but I would suggest that newer owners use a software management system. This will also help you if you are looking for additional funding. Having all this information on hand can be the difference in getting the funding you may need to expand.”