Calculating average inventory is deceptively simple

By Oleg Mikhailenko
Published in Solutions
June 24, 2022
3 min read
Calculating average inventory is deceptively simple

One of the most important but often frustrating parts of running an awesome and effective ecommerce business is inventory management. From balancing supply and demand to keeping careful track of how your order quantity is growing over time and wondering whether you’re about to hit a dry spell or- just as troublesome- an unexpected boom of orders you can’t keep up with, managing your stock can feel like you’re running blind. Towards the beginning of your ecommerce journey it can feel like you’re about to bump into trouble at every turn. How is a beginner merchant supposed to reduce all this stress?

One thing that can help is keeping an eye on what’s called your average inventory level. What’s that, you might ask? Put simply, your average merchandise inventory represents an estimation of the total value of your stock over a certain period of time. Since stock volume can peak or plummet depending on the season and waxing and waning customer demand, the practice of calculating average inventory aims to smooth out the peaks and troughs to give you a ballpark figure. As such, it’s recommended to calculate over at least two accounting periods to make sure you’re getting a fair range of input values.

Is there a way to know how to find average inventory for a given period?

Finding out how to calculate average inventory doesn’t have to be rocket science. Although there are a number of average inventory calculator programs (both standalone and integrated into a wider order management system) that can help you out if you don’t feel comfortable doing it yourself, it’s a simple enough equation that you could even do it by hand. Simply take your current inventory, add it to your previous inventory, and divide that number by the number of inventory periods you’ve considered. Like magic, that’s your average inventory formula.

How about my turnover rate?

Inventory turnover is another important metric that can help you make sense of your business. A rate that’s too low is indicative of a business struggling to make sales. The formula goes as follows: Cost Of Goods Sold divided by Average Inventory. Cost of Goods Sold (COGS) is a measure of the production cost of goods and services, including the price of raw materials, manufacturing, and factory overhead. You calculate average inventory by taking into account fluctuations throughout the year, considering both peak and off-seasons. At that point, you want to run a Days Sales of Inventory calculation by taking the inverse of your number and multiplying it by 365. This tells you exactly how many days it takes to sell out the entirety of your stock.

And my reorder point?

Reorder point calculation isn’t as difficult as it used to be before the age of technology. Your SKU manager may very well have the capacity for calculating reorder point numbers built in. If for some reason you don’t have a reorder point calculator on hand, though, here’s the time between orders formula you can use to do it by hand: Reorder Point equals Demand during lead time plus Safety stock.

It’s that simple. Of course, the trouble can come when figuring out how much demand there is during lead time, and how much safety stock you should have on hand. But let’s say that it takes a month to receive new products from the manufacturer. You may want to take the amount of orders processed during your highest month so far, and then double it or even slightly more. This ensures that your reorder level is sufficient even if there happens to be extra demand, or your new inventory is a bit late.

In conclusion

It isn’t as much of a pain as you might think to calculate average inventory numbers. But if you still don’t want to do it by hand, no worries. P2Pseller’s got it all handled. Register a free account with us today to see exactly how our software and integrations can help you stay on top of the pertinent stats better than ever before. We’d love to have you on board for the ecommerce revolution so you can scale your business, grow profits, and generally be awesome.


Tags

#averageinventory#stock#logistics#inventory
Previous Article
Stockouts and overstocking: two sides of an insidious coin

Oleg Mikhailenko

Co-Founder, CEO P2Pseller

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