Tracking the inventory of your business can give you a clear picture of where your business is going, along with any current production or sales problems. The turnover rate of finished goods is the ratio of the annual sales of your business to the average inventory of your business. A high turnover rate can mean your business is effectively selling the products it has in its inventory or that its inventory levels are too low; a low turnover rate can mean the inventory levels of your business are too high or that the products in its inventory are outdated.
Calculate the average inventory of your business by finding the sum of your starting inventory and your total inventory at the end of every month for the period you are analyzing. For example, if you have a business that makes putty knives, the value of your inventory at the start of a three-month period is $300, the value after the first month is $330, for the second month it is $300 and after the third month it is $270. So, 300 + 330 + 300 + 270 = 1200.
Divide your answer by the number of months in the period for which you are calculating turnover rate plus one. For example, 1200/(3 + 1) = 300. Your average inventory during this period is $300.
Calculate your sales during the period for which you are calculating the turnover rate of finished goods by finding the sum of your monthly sales. For example, your sales during the first month are $660, for the second month, $600, and during the third month, $540. Thus, 660 + 600 + 540 = 1800.
Divide your answer by the average inventory you have calculated. For example, 1800/300 = 6.0. Your turnover rate of finished goods is 6.0.
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