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low turnover rate can mean the inventory levels of your business are too high or that the products in its inventory are outdated.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.
- University of Florida: Retail Math Formulas
- Southern Utah University: Balance Sheet Ratios
- James Madison University; Financial Ratio Analysis; Pamela Peterson Drake
- College of Charleston: Financial Ratios and Quality Indicators
- U.S. Securities and Exchange Commission. "Beginners' Guide to Financial Statements." Accessed Feb. 23, 2020.
- Walmart. "2019 Annual Report: Defining the Future of Retail," Pages 3, 30, & 50. Accessed Feb. 23, 2020.
John Woloch writes professionally for various websites. He has published in the Dutch journal "Crux" and writes frequently on oil painting, classical languages and topics involving math and biochemistry. Woloch holds a Master of Arts in English from the University of Chicago, a Master of Arts in classics from Ohio State University and a postbaccalaureate pre-medical degree from Georgetown University.