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Inventory turns over a specific period of time is calculated by the following formula:
Inventory Turnover = Cost of Goods Sold / Average Inventory
This measure tells you the number of times your inventory is sold or used during a specific time. The number that is calculated has to be put in context. A higher inventory turnover ratio indicates that inventory does not languish in the warehouse. On one hand, too little inventory in stock can lead to lost sales if product is not there to meet customer demand. This can also lead you to be caught flat-footed if there is a sudden spike in demand. A lower ratio can mean that you have a lot of capital tied up in inventory or that you have done a poor job forecasting demand. You should benchmark your ratio against your industry’s standard.
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