The average inventory period formula is calculated by dividing the number of days in the period by the company’s inventory turnover.Īverage Inventory Period = Days In Period / Inventory Turnover
AVERAGE INVENTORY FORMULA RETAIL HOW TO
Let’s take a look at how to calculate the average inventory period ratio.
It is also important for financial analysts and investors to review because it demonstrates a company’s ability to turn its inventory into cash. Monitoring the amount of time goods sit in inventory is important in business management. This is an essential measure of a company’s efficiency converting goods into sales.Ī decreasing average inventory period typically means that product is moving at a faster rate and an increasing average inventory period indicates it is taking longer to sell the goods. It also helps management understand what products are selling fast and which products remain stagnant. This allows management to better understand its purchasing happens and sales trends in an effort to reduce inventory carrying costs. Definition: What is Average Inventory Period?Īverage inventory period is important because it shows how inventory turnover changes over time. In this sense, this ratio could also be considered an efficiency ratio. Conversely, it shows how long inventory sits on the shelf and remains unsold. In other words, it shows how long it takes a company to sell its current inventory. The average inventory period is a usage ratio that calculates the average number of days, over a given time period, goods are held in inventory before they are sold.
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