Stock to Sales Ratio: Calculation, Tips, & Examples

what is a good inventory to sales ratio

A good inventory turnover rate should thus be greater than one, and since the inventory to sales ratio is the inverse of the inventory turnover rate, a good inventory to sales ratio should be less than one. The ideal stock to sales ratio may be different for each business, as a healthy ratio is one that indicates that a company has invested in enough inventory to meet demand without over- or understocking. The ideal stock to sales ratio tends to be between 0.167 and 0.25 — but for growing ecommerce businesses, the value can be higher to account for growing order volumes.

  • This is why many retailers dump old inventory, selling at reduced prices (even at a loss), to make sure that old inventory doesn’t take away opportunities for new sales.
  • In addition, when you don’t sell inventory, you can’t use the profits to obtain new products to sell and create profits, which you then invest in new inventory, keeping the cycle going.
  • In terms of tracking inventory, we use ShipBob for everything — to be able to track each bottle of perfume, what we have left, and what we’ve shipped, while getting a lot more information on each order.
  • This indicates a healthy stock to sales ratio, which is one of the hallmarks of a lean supply chain.
  • On the other hand, if your ratio is too high, you can conclude that you’ve likely overstocked and are incurring too much storage and holding cost (which chips away at the profit margin).
  • The inventory sales ratio is crucial to your small business operations since your inventory is at once vital to your sales and among your largest expenses.

This figure, which indicates the number of times per year that you sell all your small business’s inventory, reflects how much cash your small business has available to cover expenses. If your business has low inventory turnover, it may mean that your sales are lacking, and with lower revenue comes less ability to pay your employees, suppliers, and lenders. In the case of a high inventory to sales ratio, you are likely to have surplus stock in your warehouse, which can quickly turn into deadstock if you do not improve sales or offload excess inventory. You don’t want to have too much of your capital invested in inventory (as you need to be flexible to meet ever-changing demand and avoid deadstock), but you also don’t want to stock out too soon. Stock to sales ratio, also known as inventory to sales ratio or I/S ratio, measures the value of your inventory against the value of sales for a certain period of time. Schedule a demo to learn more about Flieber, and learn how it can integrate with your supply chain, sales, and marketing operations to start identifying the right I/S ratio for your business.

Can an Inventory Ratio Be Too High?

All the figures needed to calculate stock to sales ratio can be found in the company’s income statement, balance sheet, and other financial statements. Your stock to sales ratio can help you understand how much capital you have tied up in inventory on average over a specific period of time, and how that compares to your revenue from sales. This means that for every 1 dollar sold, Allen’s Arrows had 25 cents invested in inventory. On the other hand, Bob’s Books had invested 50 cents for every 1 dollar sold—two times more than Allen’s Arrows.

While brands don’t want to pay for excess storage, brands also don’t want face insufficient inventory and miss out on sales. The inventory to sales ratio is best tracked over a long period of time (ideally, several years), which allows brands to gain insights and optimize stock levels, adjust sales models, and achieve sales growth. Every growing ecommerce brand needs to be tracking inventory management KPIs, like inventory to sales ratio, inventory turnover, and inventory days on hand. A fulfillment partner can serve as an invaluable partner in tracking and optimizing supply chain KPIs to grow business. A solid inventory management strategy, as well as the technology to back it, is critical to maintaining the right inventory to sales ratio. The many factors that influence a brand’s inventory to sales ratio — sales volume, inventory levels, COGS — need to be tracked in real-time to give brands the best information possible to analyze and optimize.

Inventory to sales is useful as a barometer for the performance of your organization and is a strong indicator of prevailing economic conditions and your ability to weather unexpected storms. This metric is closely tied to your inventory turnover ratio and, when taken together, speaks to the financial stability of your organization. It’s important to note that the cost of carrying inventory means you want to sell your inventory as quickly as possible. Use the Cash-to-Cash Cycle Time formula to calculate how fast you receive payment for your inventory on average.

  • SmartBiz helps you find the best financing for your unique needs whether that’s an SBA loan, Bank Term loan, or other financing.
  • In other words, a low inventory to sales ratio means that the business can quickly clear its inventories by way of sales.
  • Promotions and discounts are a quick way to turn specific items and increase sales overall.
  • You can determine the average inventory value by adding together the beginning inventory and ending inventory balances for a single month, and dividing by two.

No matter how big or small your ecommerce business is, it’s always important to track metrics like stock to sales ratio, inventory turnover, and inventory days on hand — and ShipBob can help you do it. Achieving the right balance is challenging, particularly in a fast-paced, ever changing global marketplace, where sales and shipping times are constantly fluctuating. There are multiple factors that contribute to sales and replenishment of inventory, including supply chain operations, historic and current sales data, and marketing campaigns, to name few.

Inventory To Sales Ratio: Seven Things To Know

According to the 80/20 rule for the inventories to sales ratio, you should assume that 80 percent of the sales that your small business makes comes from 20 percent of your inventory. This assumption can be crucial for managing your inventory to maximize your sales. When buying new stock, prioritize the 20 percent of inventory that drives sales before restocking the remaining 80 percent of your items. If you divide the number of days in the year (365) by your ITR, you’ll get your days’ sales of inventory. So, let’s say your sales for the year totaled $500,000, and your average inventory value on any given day was $100,000.

Extensiv Order Manager (formerly Skubana)includes a feature that creates purchase orders automatically (we call it auto-POS) for real-time inventory upkeep. Based on sales velocity data, the inventory optimization software recommends when and how many units of a product to order. Order management systems, including Skubana, equip brands to develop and offer the right product bundles at the right price to increase both turnover and profit. Also, a company might have an ultra-high ITR while going bankrupt because the company isn’t making enough profit on each sale.

what is a good inventory to sales ratio

The stock to sales ratio can be calculated by dividing the average inventory value in a certain period of time by the net sales achieved in that same period of time. For instance, if your stock to sales ratio is lower than you’d like, you can infer that you are stocking out and aren’t holding enough inventory to consistently meet customer demand. To increase it, you should buy more inventory (provided the company’s sales volumes don’t change), and improve demand forecasting in future seasons. Some organizations, such as ReadyRatios, track the median ITR in various industries. But while those numbers are good to know, your industry’s average ITR isn’t necessarily a good inventory turnover ratio for your business.

Calculating I/S ratio

When you’re just getting your feet wet, you can use the average ITR in your industry as a benchmark. Optimizing inventory turnover is one of the most critical parts of inventory control. You’ll want to look a bit deeper into inventory turnover differences based on industry, the size of the business, and other factors. Should these efforts fail to increase sales, change your inventory purchasing habits to buy less stock more often instead of buying more stock less often. If you make this shift, you will spend less money while holding onto fewer items you ultimately can’t sell, and you can also open storage space for better-selling items.

what is a good inventory to sales ratio

That’s natural because of the niche markets in which these industries operate. The answer to the question, “What is a good inventory turnover ratio?” is the midpoint between two extremes. You don’t want your merchandise gathering dust; however, you don’t want to have to restock inventory too often. Lower inventory to sales ratios are generally better because it means that a brand is selling through its inventory quickly. However, the most important thing is that a brand determines an inventory to sales ratio that works for its unique business and meets consumer demand—rather than just striving for the lowest ratio possible. The inventory sales ratio is a lagging indicator because it tells you what has already occurred.

How to Calculate Stock to Sales Ratio [+ Tips & Examples]

Although it’s usually not a good idea to sacrifice profit for turnover, it’s sometimes necessary—for example, when it’s more costly to store “dead stock” in your warehouse than sell it off quickly. The second step is to calculate net sales, brands should calculate their gross sales valuation (total sales before discounts and returns) and subtract from it the value of all returned sales. Both high and low inventory to sales ratios might have different interpretations based on the situations present. Some companies might have a culture of always maintaining higher inventories regardless of the sale; hence they will always have a relatively higher ratio. Similarly, a low ratio can be a result of both sales and inventories coming down considerably, but the ratio remains the same.

A lower ratio indicates that a company is effectively converting inventory into sales, while a higher ratio suggests excess stock or potential issues with product demand. If you sold 20,000 widgets for ​$4​ each during the period, your gross sales are ​$80,000​. To get your inventory-to-sales ratio, divide inventory value (​$28,000)​ by inventory sales (​$75,000)​ to get 0.37.

what is a good inventory to sales ratio

While retailers tend to think that the stock to sales ratio and inventory turnover ratio are interchangeable, the two actually measure slightly different things. While software is the most accurate way to calculate inventory turnover at a high level of detail, all the information you need for a quick calculation is available on your financial statements. Plug those numbers into the formula above, or use the calculator below to quickly determine your turnover ratio. A good inventory turnover ratio is between 5 and 10 for most industries, which indicates that you sell and restock your inventory every 1-2 months.

In simple terms, inventory turnover ratio reflects how fast a company sells an item and is used to measure sales and inventory efficiency. Inventory turnover is also known as inventory turns, stock turnover or stock turn. Flowspace’s forecasting and inventory planning software gives brands real-time insights and recommendations for inventory optimization. Actionable inventory data can help brands make informed safety stock decisions to avoid out-of-stock products.

We believe that sustainable investing is not just an important climate solution, but a smart way to invest. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Average inventory is used so that any seasonality effect is covered and can be calculated by summing the beginning and ending inventory and dividing the result by two.

That way, you can drive quicker sales with targeted promotions that ride your existing waves. The formula for calculating the inventory to sales ratio includes both a sales metric and an inventory metric. That means that if either of those change—in small or large ways—the inventory to sales ratio will also change. The cost of goods sold will also influence the inventory to sales ratio because as COGS change, so will net sales. The inventory to sales ratio can be calculated by dividing a brand’s average inventory value for a certain period of time by the net sales from that same period of time.

This inventory management KPI helps retailers understand at what pace they are liquidating stock, and how much of their capital they have invested in inventory on average. If you’re off target, consider incorporating the supply chain and customer-facing solutions we recommended for your business. Still, with reliable processes in place and a long-term inventory management strategy, you’ll be able to strike that balance sooner than you think. A well-executed marketing campaign can also do great things for inventory turnover. Some tools, such as Bold Upsell, can get more products in front of customers through upselling and cross-selling. For example, Bold Upsell can offer customers shoelaces that go with the shoes in their cart, but it can also suggest a more premium pair of shoes in a compatible or similar style.