In our 2024 QuickBooks Summary, we told you that several inventory-related reporting enhancements were either included or in development. One of those reports, planned for release sometime after the initial release, was an "Inventory Turns (turnover) Report."
This report was recently rolled out to QuickBooks Enterprise users to provide them with better insight into their inventory turnover. Such insight can assist users with making decisions based on accurate inventory turns, which can potentially lead to better purchasing decisions and improved profitability.
The new report can provide users with visibility into:
- How their items are selling,
- The days it takes to sell items in stock,
- Appropriate reorder points, quantities, and sources,
- Item profitability related to inventory on hand.
Using the Inventory Turnover Report
Inventory must be turned on under Preferences in QuickBooks Enterprise.
To run the Inventory Turnover report:
- From the main menu, go to Reports
- Select Inventory
- Choose Inventory Turnover by Item (Note: The first time you open this report, the information window above will be displayed. The link takes you to a QuickBooks 'Help' page.)
- Select Continue
- Choose the Date or Date-range you wish to review
- Modify item settings if appropriate (Note: By default, the report lists all inventory and assembly items; multiple selections are available).
- Option to Hide Zero Quantity-on-hand Items
- Sort by Default (Item list order), Turnover Ratio or Turnover Days
This report has a lot of valuable information, including the Turnover Ratio and Turnover Days for each item and the last (most recent) date the item was sold. Another great numerator is the 'average inventory' over your selected date range.
I suggest you 'play around' with this new report to get a good feel for your inventory over time. First, select All as the date range and see how things look from a total history standpoint—you might be surprised. Then check out the 'current year-to-date' and compare and contrast it with your 'last fiscal year' report.
Hiding those Zero Quantity on Hand items will make it much easier to judge your current position, especially if you have many inventory items.
If you sell many items in a season, set a date range for each season to see if item sales meet your expectations.
Interpreting the Inventory Turnover Report
As mentioned above, the new report provides you with two critical Inventory turnover measures: Inventory Turnover Ratio and Inventory Turnover Days. Understanding how these two measures are computed is critical to interpreting the report.
Inventory Turnover Ratio
The turnover ratio of inventory items is calculated by dividing the total cost of goods sold (COGS) by the average inventory value over a specified time frame. For purposes of Inventory Turnover Ratio, the Average Inventory value is the sum of the beginning and ending inventory values divided by 2.
For example, assuming the COGS is $10,000 over a year and the average inventory value is $4000, the turnover ratio will be ($10,000/$4000) = 2.5. This means your business sells and replenishes inventory 2.5 times a year.
A higher turnover ratio means your inventory is selling quickly, while a lower turnover ratio means it takes longer to sell your inventory.
Inventory Turnover Days
The turnover days for an inventory item are calculated by dividing the number of days in the specified period by the inventory turnover ratio.
For example, using the 2.5 inventory turnover ratio computed above, the inventory turnover days in a year would be computed as (365/2.5) =146 days. In other words, selling that inventory item takes your business 146 days.
A lower number of turnover days indicates your inventory is selling quickly, while a higher number of turnover days means it's taking longer to sell your inventory.
My Opinion
Personally, I think this is one of the most valuable inventory reports we've ever had made available to us.
If you have an inventory-centric business, this is the kind of report you've been needing to know exactly what your inventory items are doing.
- Are they selling?
- How fast are they selling, and over what timeframe?
- When did you last sell that item?
- How much inventory do you still have on hand?
- And how much have you been buying and paying for each item over time?
These are just some valuable inquiries you can answer using this new report.
Footnotes and Disclosures
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