How Car Dealerships Should Calculate Inventory Turnover

January 2nd, 2017 by
The automotive retail business has changed a lot in recent years. People don’t shop for cars the same way they did a few years ago, and dealerships don’t sell cars the same way (or at least they shouldn’t). Dealers have also changed how they make business decisions, too.
You and your sales managers probably spend a lot of time considering your inventory turnover. You’re looking at annual inventory turn, quarterly, monthly. Maybe even on a smaller timescale than that, and this goes for your new and used vehicle inventory.
And when you look at inventory turnover, you’re comparing it to your bottom line and you’re probably wondering “Does this add up?”
Right now, ask yourself instead: “How should I calculate my inventory turnover ratio?”
 

How to Find Your Inventory Turnover Ratio

Given that it’s expressed as a ratio, finding your inventory turnover is a matter of doing some basic math. You’re dividing one number into another, the Cost of Goods Sold by your Average Inventory.
 

    Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

 
Now you would need to do some additional math to get the values for those variables. To find your Cost of Goods Sold, just add up the total value of all the inventory you moved in the given period.
To find your average inventory, total up the number of cars in your inventory at the beginning of the period and the number of cars in your inventory at the end of the period and divide those by 2.
 

Cost of Goods Sold = (Beginning Inventory + Ending Inventory) / 2

 
This is how you can change the timescale for the turnover you’re looking at, be it weekly, monthly, quarterly, and so on.
Some dealers also like to consider their 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 = (Average Inventory / Cost of Goods Sold) x 365

or

Days Sales of Inventory = 365 / Inventory Turnover Ratio

 
If 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.
 

Inventory Management Is More Efficient with MAXDigital

We use calculators because they’re easy. You can do math in your head no problem, but when you can punch some numbers into a calculator and get the answer instantly, that frees up your brain for more analytical thinking. It’s just a way of reducing friction.
MAXDigital’s Inventory Management Platform does the same thing for your inventory. Sure, you could commit those equations to memory, but you’re better off using that mental real estate for more important details.
Our software does all the calculations for you. We’ll give you inventory turnover ratio in an instant, over whatever period you need. And then we go a step further.
The MAXDigital Inventory Management Platform also offers you sophisticated stocking and appraisal tools so you know what cars to buy and at what price. You can streamline your internal processes, improve your inventory turnover, and maximize your gross profits.
If that’s not enough, we also offer you tracking tools that will help you assess your performance on the group level and by individual store. Our detailed online analytics also keep you on top of that all important digital performance – the key to surviving in today’s auto retail market.
Does this sound like something you want to learn more about? We’re happy to fill you in on all the details. Get in touch with MAXDigital today to schedule a product demonstration about any of our solutions. We’re looking forward to hearing from you. In the meantime, good luck crunching those numbers.