This leaves us with the following COGS for our inventory turns formula. Therefore, I would include inbound freight and labour costs in the COGS value in my inventory turn calculation. The cost of freight in and labour does relate to the speed of selling inventory since the more we sell, the more labour we need to keep producing inventory and the more we would be paying inbound freight to replenish our raw materials. If the company made adjustments to the value of inventory, those adjustments are in no way related to measuring selling speed, so I would not include those in the COGS value when calculating inventory turns. We are measuring the speed of selling inventory. This is where we need to use logic to make a decision. We can also see what we paid for inbound freight and what we paid for labour, i.e., the wages for personnel creating our finished goods inventory. Looking at the descriptions of the highlighted general ledger codes, we can see that many of them are adjustments to the value of inventory for a variety of reasons. These categories are not linked to specific sales transactions. The difference between these two sets of numbers is that information from the accounting records includes additional general ledger categories that are highlighted in yellow. What’s the difference between these two representations of the COGS? Which one is better if we want to correctly interpret the speed at which our inventory sells and even more importantly, correctly interpret changes in the speed at which our inventory sells? These records yield the costs listed in the column called, “From Product Sales.”

You then extract sales records from your company database, including the cost of each sale. 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. Measuring how fast you sell through your inventory is a key measurement of inventory management performance.

Inventory turns calculation