Periodically I have students who are confused by the idea that there is not one, but three different ways to calculate inventory turnover. What really confuses them is that when using all three formulas to calculate inventory turnover (turn) for a retailer, each formula provides a different answer. And, that this happens even though each formula has the same two basic components: Sales and Average Inventory.

Let’s start with the formulas:

Retail Turnover = Annual Retail Sales/Average Retail Inventory

Cost Turnover = Cost of Goods Sold/ Average Cost Inventory

Unit Turnover = Unit Sales/ Average Unit Inventory

Example:

Retailer Z’s Financials Show:

Total Retail Sales | $2,000,000 |

Cost of Goods Sold | $1,200,000 |

Unit Sales | 180,000 |

Avg. Inventory at Retail | $400,000 |

Avg. Inventory at Cost | $220,000 |

Avg. Inventory in Units | 30,000 |

*Let’s Calculate!
*Retail Turnover = Average Retail Sales/Average Retail Inventory

= $2,000,000/$400,000 = 5.0

Cost Turnover = Cost of Goods Sold/ Average Cost Inventory

= $1,200,000/$220,000 = 5.5

Unit Turnover = Unit Sales / Average Unit Inventory

= 90,000/ 15,000 = 6.0

While the inputs are similar, they are not identical, due to each one utilizing a different method of measurement. Typically Retail Turnover will provide you with the most conservative estimate of your turn rate out of the three calculations. This is due to the fact that the Retail Sales and Average Retail Inventory numbers both have initial margin (or markups) built into them.

Next time we’ll look at interpreting and using these numbers.