Average Inventory
If your business makes or sells products, calculating its average inventory can help you gauge product performance over time. For instance, you could sell more umbrellas in a rainy April than in the sunny May that follows, but wish to calculate the average number of umbrellas in stock over that period of time to ensure you’re carrying the right amount of stock or spot discrepancies that could signal theft, breakage or spoilage.
What is Average Inventory?
In short, it is the average over any time period. In our example above, the average is the mean between the April and May. Adding the totals for each month together and dividing the total by two gives you the average.
If a business were to judge product performance by sales in a single day, the data could be skewed because it may reflect a high or low end of sales performance for the month; neither extreme would be an accurate reflection of the overall performance for the month. That is why average inventory is a better measure. If you know how to calculate average inventory over a longer time frame, that result will give you a better picture of overall performance.
How to Find Average Inventory
If you want to know the average inventory count over this two-month period of time, you would add the inventory count at the end of May to the inventory count at the end of April and divide the total by the number of data points (2).
Average Inventory = (#Products End of April + #Products End of May)/2
A similar average inventory formula applies if you want to calculate the average inventory value over this two-month period:
Average Inventory = (April Inventory Value + May Inventory Value)/2 Months
This simple method finds the mean of inventory products or value over any time period. That time period could be a certain number of days, months, or years. A good rule of thumb is to compare apples to apples, choosing comparative time periods that are equal in value. Keep in mind that the months vary in number of days throughout the year.
Calculating over longer time periods tend to return more accurate numbers. For instance, if you compare inventory counts on Saturday and Sunday to Monday and Tuesday, website traffic to an e-commerce store could be much lower on the weekend and result in fewer sales. Extending the number of days or months included will give you a more accurate picture.
Having software that can do all these calculation for you is the ideal situation, thus freeing you up to focus on more important daily tasks. That’s where SOS Inventory shines – taking on all the calculations needs to run your business successfully. If you don’t need to worry about how to calculate average inventory, you’re free to address more important things.
Average Merchandise Inventory
It is also helpful to understand how your average merchandise inventory compares to other businesses in your industry. Turnover varies by industry according to demand, seasonal variations and consumption rate of the product. For instance, food products turn over quickly as they are consumed daily. A vehicle, on the other hand, is usually not replaced often.
FAQs
Q: What is average inventory on a balance sheet?
A: Average inventory on a balance sheet refers to the average value of inventory that a company holds over a specific period, such as a month or a quarter. This value is reported as a current asset on the balance sheet and is used to calculate the inventory turnover ratio.
Q: What is average inventory also known as?
A: Average inventory is also known as “average stock” or “average level of inventory.” It represents the average value of inventory held by a company over a specific period and is an important metric for inventory management.
Q: How do you calculate average inventory in EOQ?
A: EOQ, or Economic Order Quantity, is a formula used in inventory management to calculate the optimal order quantity that minimizes total inventory costs. Average inventory is not directly calculated in the EOQ formula, but it can be calculated by dividing the EOQ quantity by two. The formula for EOQ is:
EOQ = sqrt((2 * annual demand * setup cost) / carrying cost per unit)
Once you have calculated EOQ, you can divide it by 2 to get the average inventory value.
How Does Finding the Average Inventory Value Inform Business Decisions?
Whether you run your calculations on spreadsheets or a robust inventory software program like SOS Inventory, knowing the average number of products or sales your business conducts over a time period educates management about product performance.
Knowing your average inventory allows you to calculate your inventory turnover ratio. To perform this calculation, divide the cost of goods sold by the average inventory. (The cost of goods sold should represent the same time frame as the average inventory figure). The higher this number, the faster a product sells. This number provides valuable feedback to your sales team to understand performance.
A perpetual inventory system such as SOS Inventory allows businesses to update average amount of inventory at any point in time based on the automatic updates to inventory counts that are ongoing. The sum is a moving average that accounts for market volatility. When every sale updates the physical inventory count, and numbers are updated regularly by every department in the business (every place a product is handled), figures are more reliable. Likewise, anyone in the company can generate a report about inventory counts, costs, sales, and profits at any point in time for thousands of products. Having accurate information at your fingertips – no matter which area of the business you work in – supports better decision making and saves a lot of man hours.
Having the right tool to calculate average inventory ensures transparency, accuracy, and higher profitability. Average inventory accounting with the accuracy offered by software is an easy choice. Why not get started with SOS Inventory today?
