Inventory to Sales Ratio in Excel

What is Inventory to Sales Ratio?

Inventory to sales ratio is a financial ratio that measures the amount of inventory a business has on hand relative to the amount of sales it generates over a particular period of time. It is calculated by dividing the value of the average inventory held during a given period by the value of sales generated during the same period.

The ratio is often used by businesses to evaluate their inventory management efficiency and to identify potential inventory excesses or shortages. A high inventory to sales ratio indicates that a business is holding too much inventory relative to its sales, which can lead to higher storage costs and decreased cash flow. On the other hand, a low inventory to sales ratio may suggest that a business is not holding enough inventory to meet demand, which can result in lost sales and missed opportunities.

How to Calculate Inventory to Sales Ratio in Excel?

To calculate inventory to sales ratio in Excel, we need to have the following data:

• Average inventory or stock value: This is the sum of the product’s beginning inventory and the ending inventory, divided by 2. The beginning inventory and ending inventory are computed by multiplying each stock by the production unit cost.
• Net sales: This is the total revenue a business earns from the sale of its goods or services, after subtracting any deductions such as discounts, returns, or allowances.

The formula for inventory to sales ratio is:

Inventory to Sales Ratio=Average Inventory or Stock/Net Sales​

We can use the following steps to calculate inventory to sales ratio in Excel:

1. Enter the data in a table, such as the one below:

2. Calculate the average inventory or stock value by using the formula:

= (B2*D2+C2*D2)/2

This will give us the result of 4000.

3. Calculate the net sales by using the formula:

= ((B2-C2)*E2-F2*E2)

This will give us the result of 2250.

4. Calculate the inventory to sales ratio by using the formula:

= G2/H2

This will give us the result of 1.78.

5. Format the result as a percentage or a decimal, depending on your preference.

The final table will look like this:

What Does the Inventory to Sales Ratio Mean?

The inventory to sales ratio tells us how many times the inventory is sold and replaced over a given period of time. A lower ratio means that the inventory is sold faster and more efficiently, while a higher ratio means that the inventory is sold slower and less efficiently.

The optimal inventory to sales ratio depends on the type of business, the industry, and the market conditions. Generally, a ratio between 1 and 2 is considered acceptable for most businesses, as it indicates a balance between inventory availability and sales performance.

However, some businesses may have different inventory to sales ratio goals, depending on their inventory management strategy. For example, a business that follows a just-in-time (JIT) inventory system may aim for a very low inventory to sales ratio, as it minimizes inventory holding costs and maximizes cash flow. On the other hand, a business that follows a safety stock inventory system may aim for a higher inventory to sales ratio, as it ensures inventory availability and customer satisfaction.

How to Interpret the Inventory to Sales Ratio?

The inventory to sales ratio can be used to analyze the inventory management performance of a business over time, or to compare the inventory management performance of different businesses in the same industry. Some of the ways to interpret the inventory to sales ratio are:

• If the inventory to sales ratio is decreasing over time, it means that the business is improving its inventory turnover and sales efficiency, or that the demand for its products is increasing.
• If the inventory to sales ratio is increasing over time, it means that the business is worsening its inventory turnover and sales efficiency, or that the demand for its products is decreasing.
• If the inventory to sales ratio is lower than the industry average, it means that the business is more competitive and profitable than its peers, or that it has a unique or differentiated product offering.
• If the inventory to sales ratio is higher than the industry average, it means that the business is less competitive and profitable than its peers, or that it has a common or undifferentiated product offering.

How to Improve the Inventory to Sales Ratio?

The inventory to sales ratio can be improved by either increasing the net sales or decreasing the average inventory or stock value, or both. Some of the strategies to improve the inventory to sales ratio are:

• Implementing effective inventory forecasting and planning techniques, such as demand forecasting, ABC analysis, EOQ model, etc.
• Adopting efficient inventory replenishment and ordering methods, such as JIT, EOQ, reorder point, etc.
• Reducing inventory holding costs, such as storage, insurance, obsolescence, etc.
• Increasing inventory turnover and sales efficiency, such as by offering discounts, promotions, incentives, etc.
• Enhancing inventory quality and customer satisfaction, such as by improving product design, packaging, delivery, service, etc.

Other Approaches to Calculate Inventory to Sales Ratio in Excel

Besides the formula that we have used above, there are other approaches to calculate inventory to sales ratio in Excel, such as:

• Using the AVERAGE function to calculate the average inventory or stock value, instead of the arithmetic mean formula.
• Using the SUMPRODUCT function to calculate the gross sales and net sales, instead of the arithmetic operations.
• Using the SUMIFS function to calculate the net sales, if there are multiple criteria for the sales return, such as product, date, region, etc.
• Using the XLOOKUP function to retrieve the production unit cost and the selling price per unit, if they are stored in a separate table, instead of manually entering them.

Here is an example of using these alternative approaches to calculate inventory to sales ratio in Excel: