Meet Nathan “Nate” Smith
Selling It!
A Look at the
Inventory Turnover Ratio
Nate’s Better Idea
One of Nate’s first actions was
to convince the owner to use
some of the floor space for
three new sections:
Alternative Rock
Hip-Hop/Rap
Latin
But after a few months, Nate noticed that some of the new
sections aren’t selling as well as he’d hoped.
What Should Nate Do?
the present inventories with the initial
 A. Compare
stock amounts for the new and old sections.
To better understand the actual sales, the
best thing Nate can do is to compare the
inventories: what’s left versus what was
stocked.
Or even better, what has sold versus what
was stocked.
Nate Smith works for Esperante Music
Sellers (EMS). After four years he’s
learned a lot about the “alternative music”
scene, often visiting backstage at local
concerts and clubs.
Recognizing his expertise, EMS has
promoted Nate to Buyer. In this role, he
Identifies new artists and labels.
Develops relationships with regional
suppliers.
Maintains a “hot inventory” for EMS
stores.
Question 1
Nate wonders if the new sections are selling better or worse
than the rest of the store. How can he be sure? Which of the
following would be the best course of action?
A. Compare the present inventories with the initial stock
amounts for the new and old sections.
B. Compare the profit from the new sections with that of the
old sections.
C. Survey new customers entering the store.
D. Call a competing music store and see how their sales are
going for these types of music.
Sales During a Quarter
Nate checked the
numbers on a few
bands…
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 = 0.75
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 = 0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 = 0.72
1
Question 2
Which of these three bands
has the best (highest) sales
ratio?
A. Off Center Band
B. Three Deuces
C. Raunchy Rockets
Question 3
DownRight was initially stocked
with 24 CDs. After three months,
there are 8 CD’s remaining.
What is the ratio of number sold
to number stocked?
A. 0.33
B. 0.67
C. 0.75
D. 1.33
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 = 0.75
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 = 0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 = 0.72
Sales Ratio
Which of these three bands
has the best (highest) sales
ratio?
A. Off Center Band
 B. Three Deuces
C. Raunchy Rockets
The larger the ratio, the
better the sales!
0.80 > 0.75 > 0.72
Off Center Band
Stocked: 12 CDs
Remaining: 3 CD
Sold: 12 – 3 = 9 CDs
Ratio: 9/12 =(0.75)
0.75
Three Deuces
Stocked: 20 CDs
Remaining: 4 CD
Sold: 20 – 4 = 16 CDs
Ratio: 16/20 =(0.80)
0.80
Raunchy Rockets
Stocked: 18 CDs
Remaining: 5 CD
Sold: 18 – 5 = 13 CDs
Ratio: 13/18 =(0.72)
0.72
Sales Ratio
DownRight was initially stocked
with 24 CDs. After three months,
Stocked: 24
there are 8 CD’s remaining.
–
Remaining:
8
What is the ratio of number sold
Sold: 16
to number stocked?
A. 0.33
Sold
16
Ratio :

 0.67 (rounded)
 B. 0.67
Stocked 24
C. 0.75
D. 1.33
Question 4
Ratio to Percentage
So, DownRight’s sales ratio is
0.67. What percentage of
DownRight’s disks have sold?
A. 33%
B. 57%
C. 67%
D. 75%
E. 133%
So, DownRight’s sales ratio is
0.67. What percentage of
DownRight’s disks have sold?
A. 33%
B. 57%
Percentage  Ratio 100%
 0.67 100%
 C. 67%
 67%
D. 75%
E. 133%
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A Better Way
We’ve been calculating a ratio based simply
on a count of the CDs.
In reality, the store owner is more interested
in costs and income:
The cost to stock the shelves.
The cost of stock remaining.
The income from sales of those CDs.
Question 5
Recall Nate initially stocked 24 of
DownRight’s CDs, and now there are 8 left.
If the CDs cost Nate $4 each, what is
DownRight’s Inventory Turnover Ratio?
A. $4 per CD
B. $3.33
= $4
C. 75%
D. 0.67
Nate Takes Inventory
Nate’s consults his paperwork from stocking the
shelves with $4 CDs, and also counts the number of
unsold CDs in each section.
Latin :
Stocked: 156
Unsold: 31
Alternative Rock:
Stocked: 262
Unsold: 123
Hip-Hop/Rap:
Stocked: 398
Unsold: 33
Ratio of Costs
Using costs (rather than counts):
Ratio 
Cost of Goods Sold
Inventory Cost
where the costs can be calculated:
Cost  Number of Items  Cost per Item
whether it’s cost of items sold, or cost of items in
inventory.
This ratio is known as Inventory Turnover Ratio.
Inventory Turnover Ratio
 D. 0.67
The “cost of good sold” is the number sold times
the cost of each: 16 x $4 = $64.
The “inventory cost” is the number stocked times
the cost of each: 24 x $4 = $96.
Thus,
Cost of Goods Sold
Inventory Cost
$64

 0.67 (rounded)
$96
Inventory Turnover Ratio =
Question 6
Latin: Stocked: 156, Unsold: 31 ($4 ea)
Alternative Rock: Stocked: 262, Unsold: 123 ($4 ea)
Hip-Hop/Rap: Stocked: 398, Unsold: 33 ($4 ea)
What are the inventory turnover ratios for the three
sections, respectively?
A. 0.20, 0.47, 0.08
C. 0.20, 0.13, 0.23
B. 0.31, 1.23, 0.33
D. 0.80, 0.53, 0.92
3
Inventory Turnover Ratios
 D. 0.80, 0.53, 0.92
For each category, calculate the ratio of number
sold to number stocked.
For Latin: Stocked: 156, Unsold: 31 ($4 ea)
Number Sold  Number Stocked  Unsold
 156  31  125
Number Sold
Number Stocked
125

 0.80 (rounded)
156
Inventory Turnover Ratio 
Inventory Turnover Ratios
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
A.
Hip-Hop/Rap is fastest; Rock is slowest
The largest ratio (0.92) indicates the greatest
turnover, or the fastest selling CDs.
The smallest ratio (0.53) indicates the least
turnover, or the slowest selling CDs.
A Quarterly Inventory
Turnover Ratio
From Esperante’s
“financials” for
the last quarter,
Nate finds the
“cost of goods
sold” on the
income statement.
Question 7
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
Based on the inventory turnover ratios above, which
new section is selling the fastest? Which is selling
the slowest?
A. Hip-Hop/Rap is fastest; Rock is slowest
B. Latin is fastest; Hip-Hop/Rap is slowest
C. Hip-Hop/Rap is fastest; Latin is slowest
D. Rock is fastest; Hip-Hop/Rap is slowest
What’s a “Good”
Turnover Ratio?
Nate is a little worried about the Alternative
Rock section—at least compared to the
other new sections.
But, how do these ratios compare to the rest
of the store’s CD sales?
To answer that question, he consults
Esperante’s quarterly income statement and
balance sheet.
A Quarterly Inventory
Turnover Ratio
And from
the balance
sheet, he
finds the
inventory
cost (or
value) for
the same
quarter.
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Question 8
What is Esperante’s
Inventory Turnover
Ratio based on the
previous quarter’s
statements?
A. 0.42
B. 0.85
C. 1.17
D. 2.54
Question 9
Regarding the inventory turns
ratio, which of the following
would the store manager most
like to see?
A. More sales, and a higher
ratio.
B. More sales, and a lower
ratio.
C. More inventory, and a
lower ratio.
D. Less inventory, and a
higher ratio.
Question 10
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
How do the turnover ratios of Nate’s new sections
compare to Esperante’s quarterly turnover ratio (1.17)?
A. They are all doing better than the rest of the store.
B. None are performing as well as the store average.
C. Latin and Alternative Rock are more popular; HipHop/Rap is worse.
D. Hip-Hop/Rap is a hit; the other two are worse.
Esperante’s
Inventory
Turnover
Ratio
 C. 1.17
Cost of Good Sold $232,710

$198,718
Inventory Cost
 1.17 (rounded)
Inventory
Turnover
Ratio
 A. More sales, and a
higher ratio.
A business always wants
more sales!
More sales will yield a
higher inventory turnover
ratio.
Note: a lower inventory will
also cause a higher ratio.
Comparing Ratios
Latin: 0.80
Alternative Rock: 0.53
Hip-Hop/Rap: 0.92
 B. None are performing as well as the store average.
All the new types of music have a lower turnover
ratio than the store’s quarterly value of 1.17.
0.53 < 0.80 < 0.92 < 1.17
So, all the new types of music are selling worse
than the rest of the store’s music offerings.
5
Interpreting the Inventory
Turnover Ratio
Should be compared against your industry
averages.
Some businesses have a very high turnover; others
have a very low turnover.
A low turnover ratio generally implies poor sales
and/or large or excessive inventories.
A high ratio implies either strong sales or
insufficient inventories.
Question 11
In general, which of the
following businesses do you
think would have a relatively
low inventory turnover ratio?
A. Bakery
B. Auto Parts
C. Florist
D. Cellular phone company
Low Inventory
Turnover Ratio

B. Auto Parts
A typical automotive parts store has a large
inventory of parts for many different car makes
and models.
The sales rate of any given part is relatively low.
Low sales and large inventory lead to a low
inventory turnover ratio.
WHAT IS INVENTORY?
▪ The value or quantity of raw materials, components,
assemblies, consumables, work in progress (WIP)
and finished stocks that are kept or stored for use as
the need arises
▪ The term is also applied to:
▪ A detailed list of goods or articles in a given place
▪ A stocktaking
▪ Inventory (or stock) control – techniques used to
ensure that stocks of raw materials or other goods
are kept at levels that provide maximum service
level at minimum costs
INVENTORY TURNOVER
RATE
PLANNING OF INVENTORIES
▪ Since it is not always possible (or economical) to
synchronize the delivery and consumption of
items of work, it is necessary to keep stock in
order to be able to meet short term needs for
products that are constantly running with larger
or smaller fluctuations;
▪ We strive not to „freeze” much capital in our
inventory (it should be consistent with the
dynamics of customer needs and possibilities of
sourcing).
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PLANNING OF INVENTORIES
▪ Too small stocks threaten the normal supply of
customers, which can lead to:
▪
▪
▪
▪
▪
bottlenecks of reproduction process;
needs of urgent ordering items of work;
reorientation of production to other tasks;
delay contracted deliveries of finished products;
reducing the market share of sales.
NORMATIVES OF INVENTORIES
▪ They represent a certain quantity of materials, parts
and merchandise within inventories move to ensure
smooth functioning of the reproduction process;
▪ Normatives vary depending on:
▪
▪
▪
▪
▪
planned usage/sales materials/goods;
purchasing conditions;
transport conditions;
characteristics of the object of labor;
storage conditions.
PLANNING OF INVENTORIES
▪ Excessively high stocks:
▪ reduce business efficiency, because they create
unnecessary storage costs and inventories;
▪ there is a risk of obsolescence and loss of material in
stock, and the appearance of non-competitive stock.
SAFETY STOCK
▪ Used to:
▪ cover needs only in cases where there is a greater
consumption of items of work than planned;
▪ in cases of delayed delivery, delivery to the wrong
place, or delivery of the wrong materials;
▪ if the actual stock is lower than in the records due to
loss and theft.
▪ In practice we usually determine safety, signaling and
maximum stocks.
SIGNAL STOCK
▪ The quantity of stocks where we need to start
acquiring again in order to timely supplement
stock, that during the acquisition we do not have
to use a safety stock;
▪ To determine the norms of signal stock we need
to have accurate information on the consumption
of the products in the planning period and the
delivery time of the supplier;
AVERAGE INVENTORY VALUE
▪ Average inventory value (AIV) - the sum of the
stock at the end of each month divided by the
number of months
AIV = (IV1 + IV2 + ... + IVn) / n
▪ It is established for items that are spending
continuously.
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RATE OF STOCK-TURN
(INVENTORY TURNOVER RATE)
▪ Obtained by dividing annual turnover (sales) at cost by the
annual average inventory value
RATE OF STOCK-TURN
(INVENTORY TURNOVER RATE)
▪ Average days sales (ADS) show how long the
commodities are on stock;
AVERAGE DAYS TO SELL INVENTORY= 365/RST
ADSI = 365/6 = 60,83 days
▪ Shows how many times average stocks turn within a year
▪ If a stock turn is 6, company sells the average stock 6 times
per year
RATE OF STOCK-TURN
(INVENTORY TURNOVER RATE)
▪ The objective of stores is high inventory turnover and low
average days sales: the goods are selling faster, store
operates more successful, assets are less related to
inventory;
▪ Too high inventory turnover indicates that a company
often depletes stocks and thus probably loses customers;
▪ Low inventory turnover implies that the company has a
poor quality (outdated, damaged, corrupt) stocks.
Example 1:
▪ COMPANY A:
▪ annual turnover = EUR 60.000;
Stocks are likely to be replenished every 60 days (every
two months)
RATE OF STOCK-TURN
(INVENTORY TURNOVER RATE)
▪ “Good stock turn” varies by the product and
industry
▪ Examples:
▪ Turnover of a supermarket (FMCG) is 20-25 times
larger than turnover of a pet shop
▪ Turnover of a bakery is more than 30 times larger
than turnover of a fashion store
Example 1:
▪ Average inventory value:
(14.000 + 10.000) / 2 = 12.000
▪ beginning inventory = EUR 14.000;
▪ ending inventory = EUR 10.000
▪ Calculate Rate of Stock turn in Company A!
▪ Calculate how many days are inventories stored at this
company! Interpret your results!
▪ If Company B has a stock turn of 8, can you give your opinion
on efficiency of inventory management at Company A?
▪ And what if we have a data that our main competitor has a
turnover of 4?
▪ Rate of Stock turn:
60.000 / 12.000 = 5
Company sells the average stock 5 times per year.
▪ Average days sales:
365/RST = 365 / 5 = 73 days
Stocks are likely to be replenished every 73 days.
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Example 2:
Example 2:
▪ Average inventory value:
▪ Enterprise Geo-traffic has generated 450.000 kuna of
annual income from the sale of products. The value of the
initial stock in the first quarter was 150.000 kn, the second
145.000 kn, 148.000 kn in the third and 152.000 kn in
fourth quarter. Calculate the rate of stock turn and
average days sales for these products.
▪ The average days to sell inventories for Pek-prom
company are 100 days. Can you compare these two
companies!
(150.000+145.000+148.000+152.000) / 4 = 148.750
▪
▪ Rate of Stock turn:
▪
450.000 / 148.750 = 3,02
▪
Company sells the average stock 3 times per year.
▪ Average days sales:
▪
365/RST = 365 / 3,02 = 120 days
▪
Stocks are likely to be replenished every 120 days.
PROCUREMENT PLANNING AND
INVENTORY TURNOVER RATE
▪ After calculating average inventory value and the
rate of stock turn, it is important to find out how
much money we need to meet all the
procurement plans;
▪ Cash requirements (CR) - the ratio of the planned
sales (PS) and inventory turnover ratio (RST)
CR = PS / RST
Example 3:
▪ Company A, B and C are planning to sell 600 tons of material in
value of 1.550.000,00 kuna, with following stocks:
Stocks in
1st quarter
Stocks in
2nd
quarter
Tons
94
93
81
52
Tons
114
93
140
93
Tons
62
100
47
31
Company
Units of
measure
A
B
C
Stocks in
Stocks in
3rd quarter 4th quarter
▪ Calculate average inventory value, rate of stock turn and cash
requirements for each company (A, B and C)!
Example 3:
Company
Average inventory value
Rate of stock turn
Cash requirements
A
AIV=(94+93+81+52)/4=
80 t
RST=600/80=7,5
CR=1.550.000,00/7,5=
206.667,00 kn
B
AIV=(114+93+140+93)/4=
110 t
RST=600/110=5,45
CR=1.550.000,00/5,45=
284.403,00 kn
C
AIV=(62+100+47+31)/4=
60 t
RST=600/60=10
CR=1.550.000,00/10=
155.000,00 kn
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