COGS doesn’t include costs like shipping and distribution that aren’t directly related to the creation of the goods. In our example, let’s say that we had a high-yield year for coffee, having spent $3 million on seeds, pesticides, and other expenses related to growing coffee beans and $2 million on labor costs from cultivating the seeds. In this case, we could say our COGS is $3 million + $2 million = $5 million.

Let’s say that, in our example, at the beginning of the year we had $0. 5 million worth of coffee beans stored as inventory in our warehouses. At the end of the year, we had $0. 3 million worth of beans. (0. 5 million + 0. 3 million)/2 = an average of $0. 4 million in inventory. Next, divide COGS by average inventory to find our inventory turnover. In our example, COGS is $5 million and average inventory is $0. 4 million, so our inventory turnover for the year is $5 million/$0. 4 million = 12. 5. This quantity is a ratio and has no units.

When choosing data points, make sure your points are evenly-spaced throughout the time period at regular intervals. For instance, if you’re finding average inventory for a year, don’t use twelve points from January. Instead, use one point from the first of each month. Let’s say that our starting inventory for a year of operating our business is $20,000 and that our ending inventory is $30,000. Using the basic method above, we would get an average value of $25,000. However, just one additional data point can give us a different picture. For instance, let’s say we also use a point from the exact middle of the year with a value of $40,000. In this case, our average inventory is ($20,000 + $30,000 + $40,000)/3 = $30,000 — a little higher (and more representative of the actual average) than before.

For instance, let’s say that we have an inventory turnover ratio of 8. 5 for a given year. By dividing 365 days/8. 5, we get 42. 9 days. In other words, on average, we sell an entire stock of inventory about every 43 days. If you found your inventory turnover for a period of time other than a year, substitute the number of days in your time period for 365 days in the formula. For instance, if you had an inventory turnover of 2. 5 for the month of September, you would find your average time to sell your inventory by dividing 30 days/2. 5 = 12 days.