How Car Dealerships Should Calculate Inventory TurnoverJanuary 2nd, 2017 by MAXDigital
How to Find Your Inventory Turnover RatioGiven that it’s expressed as a ratio, finding your inventory turnover is a matter of doing some basic math.The ratio is typically used to help you understand the number of times your inventory fully turns over in a year, said differently it’s the number of times you would need to purchase the average inventory you hold per year. The basic equation is below.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory ValueDon’t know your Cost of Goods Sold or Average Inventory Value? Help is below.
Cost of Goods SoldTo find your Cost of Goods Sold, just add up the total value of all the inventory you sold in the given period. If it’s helpful to think of as a formula that’s below as well.
Cost of Goods Sold = Beginning Inventory Value + Value of Any Inventory Purchased during the period – Ending Inventory ValueTypically, dealers are looking at the former 12 months of cost of goods sold, so you would have beginning inventory value one year ago, plus the value of all new inventory received in the year, minus the value current inventory left on the lot to get the cost of goods sold over the last 12 months.
Average Inventory ValueTo get your Average Inventory Value just add the end of month inventory value number for the last 12 months and divide by 12. The general formula for Average Inventory Value is:
Average Inventory Value = (Sum of Inventory Values for Time Period / number of Values).If you want to see how your most recent month is tracking, you can simply take the beginning inventory value of the most recent complete month plus the ending inventory value of that month divide by two or use the calculator below to get your most recent Average Inventory Value. Include that most recent Average Inventory Value in the calculator above for Inventory Turnover Ratio. If your Inventory Turnover Ratio increased with your most recent Average Inventory Value that’s a good sign that you are on a positive track. Now that you have everything you need to calculate your Inventory Turnover Ratio you can also use that to calculate your Days' Sales of Inventory or the number of days it takes to sell a given inventory. The formula for that is as follows:
Days' Sales of Inventory = 365 / Inventory Turnover RatioIf you’re interested in these numbers, as any car dealer should be, it means you’re concerned about how efficient you and your sales managers are at managing your inventory. Are you stocking as many cars as you should be? Are you overstocking? These are the right questions to be asking, and if you have the right tools, you should come to the right answer even faster.