Updated: Nov 4, 2019
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 may be wondering “How can I improve my merchandising and inventory turns?”
But that’s jumping ahead. Right now, you are asking yourself, “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.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 Value
Don’t know your Cost of Goods Sold or Average Inventory Value? Help is here. In automotive, your Cost of Goods Sold, may be labeled “Cost of Sales” on financial documents in dealerships.
Cost of Goods Sold
Your Cost of Goods Sold or Cost of Sales is the total value of all the inventory you sold in the given period. At many dealerships, a Cost of Sales number may already be calculated for you. If it’s not, take your Retail Sales for the time period, minus your front-end retail gross and that equals your Cost of Sales.
Your Total Retail Sales-Front End Retail Gross=Cost of Sales
Another way to calculate your Cost of Goods Sold, is to add the total value of your beginning inventory, plus inventory purchased and subtract any inventory that remains to be sold. See the formula below.
Cost of Goods Sold = Beginning Inventory Value + Value of Any Inventory Purchased during the period â€“ Ending Inventory Value
If you are trying to look at Cost of Goods Sold for a full year using this method, you can take the beginning inventory value one year ago, add the value of all new inventory received during the year, subtract the value of your current inventory left on the lot to get the cost of goods sold over the last 12 months.
Now that you have a Cost of Sales, also known as Cost of Goods Sold value you are ready to calculate the Average Inventory Value.
Average Inventory Value
To 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 Ratio
What’s a Good Inventory Turnover Ratio?
Inventory Turn Ratio should be looked at as part of an overall scorecard including profitability. While every dealership will have a number that works for them, 12 turns or holding 30 days of inventory is the gold standard. Specialty cars may have to have a lower turn number, while higher volume dealers may be able to maintain a higher turn. Jasen Rice, owner of Lotpop, sums it up simply, “Sell what you carry and carry what you sell.”
Moving your inventory with better merchandising
One of the strongest levers for helping your inventory to sell is making sure that your vehicles are visible and front line ready. From MAX BDC to MAX Ad & Syndication and MAX Digital Showroom, MAX can help you merchandise and share all the value of your vehicles to get more customers in store. Get in touch with MAX Digital today to schedule a product demonstration about any of our solutions.
In the meantime, good luck crunching those numbers.