![]() ![]() They show you the values in the column called, “From Accounting.” This is a list of general ledger account numbers that are part of the company’s overall COGS which is reported on its financial statements. Suppose you go to your company accountant and ask them for details on the COGS calculation. While the formula looks simple, there are a few important details you need to know about when determining the values for the cost of goods sold (COGS) and inventory for this formula. My focus is on helping clients with inventory and operational analytics, so I’m going use the second formula for the rest of this explanation. That means their focus is on unit quantities and not selling price. Since supply chain professionals use this metric to measure how well they manage inventory, their interest lies in the speed at which product is shipped out to customers. The finance department tends to like the first formula, whereas supply chain professionals like the second formula. The second formula does not relate in any way to price. The difference between these two formulas is that the first one, since it contains sales, has a price component built in. In both cases, the values put into these formulas are in dollars, Euros, pounds or whatever the base currency is for your company. When I create real-time dashboards for clients, I also like to display inventory turns based on the last 365 days so clients can see if they’re improving their inventory management without having to wait for the end of the next quarter or end of the next year to find that out. Most companies measure inventory turns on an annual or quarterly basis. So, the number of inventory turns tells us how many times we sold through our inventory in a given period of time. What do we mean when we reference an inventory turn? What did we actually turn our inventory into? We sold it and turned it into revenue. I’m going to call it inventory turns throughout this explanation. This metric goes by several names, so don’t worry if you hear multiple references. For example, if a competitor has an inventory ratio of 7, this indicates that Wal-Mart is more effective at estimating demand, and from the perspective of an investor, has a competitive advantage.Measuring how fast you sell through your inventory is a key measurement of inventory management performance. The ratio is most useful for comparing companies within the same industry. Moreover, when there's low inventory turnover, it indicates that the company is failing to accurately project what the demand is for the products it sells. ![]() ![]() The longer a company holds on to inventory, the more expenses it incurs to store it, which ultimately reduces profits. The goal of any retailer is to have a high inventory ratio, since it's always better to sell inventory in the shortest amount of time possible. This tells you that Wal-Mart depletes and replenishes its inventory nine times per year to satisfy consumer demand for its products. Therefore, the resulting inventory turnover ratio was equal to a little more than 9. Wal-Mart reported its cost of goods sold as $304.66 billion. Wal-Mart's average inventory was equal to $33.84 billion, representing the beginning inventory balance of $34.51 billion and ending balance of $33.16 billion divided by 2. To illustrate how the ratio is useful, access the 2010 financial statements for Wal-Mart and extract the pertinent data for calculating the ratio. ![]()
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