How Car Dealerships Should Calculate Inventory Turnover

January 2nd, 2017 by
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’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.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

Try it!
 /   =  
 
Don’t know your Cost of Goods Sold or Average Inventory Value? Help is below.
 

Cost of Goods Sold

To 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 Value

Typically, 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 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.
Try it!
(  +  )  /  2  =  
 
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

Try it!
365  /   =  
 
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 MAX Digital

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.
MAX Digital’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.
The MAX Digital Inventory Management Platform 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 MAX Digital 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.