27 Important Inventory Formulas to Improve Your Planning

Ever wonder how you’re supposed to keep up with all the different inventory formulas? There are a lot of them. The problem is, you need to be aware of them and use inventory software that makes use of them at the right time, otherwise, the inventory problems start.

Stockouts, overstocks, holding costs, losing sales, losing customers, wasting time, breaking or at least bending supplier relationships, poor cash flow and a lot of frustrated staff are just a few of the challenges that come up without inventory optimization.

If you want to improve your inventory planning, make note of the 27 inventory formulas below and find the software that uses the right calculations at the right time for your business.

Table of Contents

What are Inventory Formulas?

Inventory formulas are calculations your business can use to plan and manage your stock in a variety of circumstances. They consider everything from cost of goods sold (COGS) to ABC analysis and reorder points. They’re vital for effective inventory forecasting, planning and management.

Why is it Important to Use Inventory Formulas?

Inventory formulas support your inventory planning. They help to prevent overstocks, which reduces inventory carrying costs and they also help to avoid stockouts. According to Nielson IQ, stockouts cost retailers $82 billion in 2021 alone. Poor inventory planning can lead to the following issues:

  • Stockout and overstock costs. Stockout costs and overstock costs can cause serious problems. The long-term costs of losing customers because stock isn’t available are hard to calculate and overstocks can cause inconsistent cash flow. The right formulas can help to prevent this from happening.

  • Increased inventory storage fees. Storage fees are not a cost anyone wants but even with the best inventory plan, you’ll have to deal with some storage fees. Well-managed inventory based on calculations from inventory formulas stops those fees from increasing.

  • Poor customer experience. When you don’t have enough stock, customers will find the products they need somewhere else and they may never come back. At the very least, your brand reputation is damaged and it takes longer to get it back than it did to lose it.

  • Inconsistent cash flow. Cash flow keeps your business running. If your cash is tied up in immovable or slow-moving stock, you won’t be able to invest in sales, marketing or more inventory, which you need to keep growing your business.

  • Wasted time. When you’re not using the right inventory formulas and inventory planning software, you need to manage your stock manually. This wastes time and resources that can be better spent on other areas of the business.

  • Damaged supplier relationships. Suppliers need consistency and clarity from your business so they can prepare for future orders. When you don’t have the right inventory formulas in place, you can’t inform your suppliers properly, which damages relationships.

27 Inventory Formulas to Improve Planning

Now that you know the dangers of not using the right formulas in your inventory, let’s explore 27 inventory formulas to improve planning:

  1. Beginning Inventory
  2. Average Inventory
  3. Ending Inventory
  4. Cost of Goods Sold (COGS)
  5. Lead Time
  6. Lead Time Demand
  7. Inventory Turnover Ratio (ITR)
  8. Safety Stock
  9. Inventory-to-Sales Ratio (I/S Ratio)
  10. Average Sales
  11. Daily Sales Velocity (DV)
  12. Stockout Costs
  13. Stockout Rate
  14. Gross Profit
  15. Gross Margin Return On Inventory (GMROI)
  16. Reorder Point
  17. Average Stock Level
  18. Days Inventory Outstanding (DIO)
  19. Maximum Stock Level
  20. Inventory Holding Cost
  21. Inventory Sell-Through Rate
  22. Economic Order Quantity (EOQ)
  23. Stock Turnover
  24. ABC Analysis
  25. Forward Stock Cover
  26. Weeks of Supply (WOS)
  27. Shrinkage

1. Beginning Inventory

Beginning inventory is the total monetary value of in stock items that are ready to use or sell at the beginning of an accounting period. It matches the previous period’s ending inventory.

$$\text{Beginning inventory} = \text{COGS} + \text{ending inventory} - \text{purchase costs}$$

Beginning inventory example:

  • COGS (cost of goods sold) = $800,000
  • Ending inventory = $600,000
  • Purchase costs = $400,000

Beginning inventory = $800,000 + $600,000 - $400,000 = $1,000,000

2. Average Inventory

Your average inventory is the mean of the inventory you have on hand during a given period. Calculate it by adding the beginning inventory to the ending inventory for a particular period and divide that figure by 2.

$$\text{Average inventory} = \frac{\text{beginning inventory} + \text{ending inventory}} 2$$

Average inventory example:

  • Beginning inventory = $1,000,000
  • Ending inventory = $900,000

Average inventory = ($1,000,000 + $900,000) ÷ 2 = $950,000

3. Ending Inventory

Ending inventory is the value of the stock remaining at the end of an accounting period. It matches the next period’s beginning inventory.

$$\text{Ending inventory} = \text{beginning inventory} + \text{purchase costs} - \text{COGS}$$

Ending inventory example:

To see how beginning and ending inventory are linked, we’ll make this example the ending inventory for the accounting period before the beginning inventory example above.

  • Beginning inventory = $1,500,000
  • Purchase costs = $400,000
  • COGS = $900,000

Ending inventory = $1,500,000 + $400,000 - $900,000 = $1,000,000

4. Cost of Goods Sold (COGS)

Costs of goods sold are the direct production costs of products sold by a business, including direct labor and materials. It doesn’t include indirect expenses like indirect labor, distribution costs and sales force costs. It’s sometimes referred to as “cost of sales” and it only relates to the cost of products that were actually sold. Products that are still part of your inventory won’t have a COGS figure until they’re sold.

$$\text{COGS} = \text{beginning inventory} + \text{purchase costs} - \text{ending inventor}y$$

COGS example:

  • Beginning inventory = $1,300,000
  • Purchase costs = $700,000
  • Ending inventory = $900,000

COGS = $1,300,000 + $700,000 - $900,000 = $1,100,000

5. Lead Time

Lead time is the gap between the moment a business issues a purchase order and the moment goods are received. You can use various time measurements but most businesses use days.

$$\text{Lead time (days)} = \text{delivery date} - \text{order date}$$

Lead time example:

  • Delivery date = March 31
  • Order date = March 14

Lead time (days) = 31 - 14 = 17

💡Pro Tip: Maintain optimum stock levels and adjust to sudden changes by using Singuli to manage multiple vendors and products with different lead times.

6. Lead Time Demand

Your lead time demand is the total demand between reordering and delivery.

$$\text{Lead time demand} = \text{lead time} \times \text{demand}$$

Lead time demand example:

  • Lead time = 17 days
  • Demand (per day) = 5

Lead time demand = 17 × 5 = 85 units

7. Inventory Turnover Ratio (ITR)

ITR is the number of times your inventory is sold and replenished over a specific time period. Its purpose is to understand the speed of sales and to use that to work out your inventory efficiency. The ideal ITR for your business will depend on a number of factors including the type of goods you sell and the industry you’re in. If your ITR is too high, you risk stockouts but if it’s too low, you risk overstocks.

$$\text{ITR} = \text{COGS} \div \text{average inventory}$$

ITR example:

  • COGS = $800,000
  • Average inventory = $200,000

ITR = $800,000 ÷ $200,000 = 4

This means you turned over your inventory four times in this period.

8. Safety Stock

Safety stock mitigates the risk of stockouts if there’s an unforeseen change, like a sudden surge in demand or an increase in supplier lead times. There’s more than one formula for safety stock. The average safety stock formula is the most common.

$$\text{\footnotesize Average safety stock} = \left(\text{\scriptsize max daily units sold} \atop \overset{\times}{\text{\scriptsize max lead time in days}}\right) - \left(\text{\scriptsize average daily units sold} \atop \overset{\times}{\text{\scriptsize average lead time in days}}\right)$$

Average safety stock example:

  • Max units = 20
  • Max lead time = 10
  • Average units = 12
  • Average lead time = 4

Average safety stock = (20 × 10) - (12 × 4) = 152

💡Pro Tip: Plan for multiple versions of the future with Singuli’s Scenarios. Ask “what if” and get answers immediately

9. Inventory-to-Sales Ratio (I/S Ratio)

The I/S ratio compares inventory value to sales. It’s preferable to keep this number low so you don’t experience overstocks but you need to take care not to inadvertently cause stockouts. Strong demand forecasting and the right software will help with this.

$$\text{I/S Ratio} = \text{average inventory} \div \text{sales}$$

I/S Ratio example:

  • Average inventory = $300,000
  • Sales = $1,200,000

I/S Ratio = $300,000 ÷ $1,200,000 = 0.25

10. Average Sales

To work out your average sales, you divide your sold inventory by the period of time it took to sell it.

$$\text{Average sales} = \text{total sales} \div \text{time to sell (days)}$$

Average sales example:

Total sales = $660,000 Time to sell = 30 days

Average sales = $660,000 ÷ 30 = $22,000 per day

11. Daily Sales Velocity (DV)

Daily sales velocity is similar to average sales but it only considers the days your products are in stock. It allows for a more accurate retail demand forecast.

$$DV = \frac{\text{total sales}}{\text{number of days product was stocked}}$$

Daily sales velocity example:

Total sales = $660,000 Days with product in stock = 15

DV = 660,000 ÷ 15 = $44,000 units per day

12. Stockout Costs

Stockouts occur when you don’t have enough inventory remaining to meet demand. Stockout costs are complicated and include loss of sales, loss of customers, strained supplier relationships and more. Stockout costs can be difficult to measure.

$$\text{Stockout costs} = DV \times \text{days out of stock} \times \text{costs of supply}$$

Stockout costs example:

DV = $44,000 Days out of stock = 10 Costs of supply = $3,000

Stockout costs = $44,000 × 10 × $3,000 = $1,320,000

13. Stockout Rate

Stockout rates show the percentage of unfulfilled orders based on the total units ordered and the amount you were actually able to ship.

$$\text{Stockout rate} = \frac{\text{quantity of stock unfulfilled}}{\text{total order quantity requested}} \times 100$$

Stockout rate example:

Quantity of stock unfulfilled = 200 units Total order quantity requested = 2,000 units

Stockout rate = (200 ÷ 2000) × 100 = 10%

14. Gross Profit

Your gross profit is your revenue minus COGS. It doesn’t account for expenses like non-related labor or marketing.

$$\text{Gross profit} = \text{revenue} - \text{COGS}$$

Gross profit example:

  • Revenue = $700,000
  • COGS = $100,000

Gross profit = $700,00 − $100,000 = $600,000

15. Gross Margin Return On Inventory (GMROI)

GMROI evaluates the profitability of every dollar you spend on inventory. You can assess on a store, sector or even size curve basis, depending on your needs. This means you can discover if a particular product or store is driving profit, breaking even or making a loss.

$$\text{GMROI} = \frac{\text{gross profit}}{\text{average inventory cost}}$$

GMROI example:

  • Gross profit = $300,000
  • Average inventory cost = $75,000

GMROI = $300,000 ÷ $75,000 = $4

The GMROI in this example, for every $1 you spend on your inventory, your business would make $4.

💡Pro Tip: Automatically compute the right size curve for every sized-based product in your assortment with Singuli’s size-based forecasting and planning tools.

16. Reorder Point

It’s not easy to know the ideal time to reorder. You don’t want too much stock but stockouts cause even more problems. Reorder points help you to formulate the best time. To work it out, you need to know your lead time demand and safety stock.

$$\text{Reorder point} = \text{lead time demand} + \text{safety stock}$$

Reorder point example:

  • Lead time demand = 40
  • Safety stock = 25

Reorder point = 40 + 25 = 65

📌Get Started: Never miss a potential sale. Use Singuli to send reorder alerts straight to your inbox so you’re always ready to meet customer demand.

17. Average Stock Level

Your average stock level is the average quantity of inventory you usually carry.

$$\text{Average stock level} = \text{minimum stock level} + \frac{\text{reorder quantity}} 2$$

Average stock level example:

  • Minimum stock level = 140
  • Reorder quantity = 400

Average stock level = 140 + (400 ÷ 2) = 340

18. Days Inventory Outstanding (DIO)

DIO is also known as DII (days in inventory) and DSI (days sales of inventory). It shows you the average number of days it takes your store to sell its stock. This is useful data to add to your inventory planning software when you forecast demand.

$$\text{DIO} = \frac{1}{\text{Inventory Turnover Rate}} \times 365$$

DIO example:

  • ITR = 5

DIO = (1 ÷ 5) × 365 = 73

19. Maximum Stock Level

Your maximum stock level is the most inventory you can hold without causing an overstock.

$$\scriptsize\text{\footnotesize Maximum stock level} = (\text{\footnotesize reorder point} + \text{\footnotesize reorder quantity}) - (\text{\footnotesize minimum demand} \times \text{\footnotesize lead time})$$

Maximum stock level example:

  • Reorder point = 50
  • Reorder level = 300
  • Minimum demand = 3
  • Lead time = 10

Maximum stock level = (50 + 300) - (3 × 10) = 320

20. Inventory Holding Cost

Your inventory holding cost (also referred to as inventory carrying cost) gives you an accurate assessment of your warehousing spend as a percentage. To calculate it, you need to know your inventory holding amount, which is the sum of your stock service cost, inventory risk charge, capital cost and storage space fee.

$$\text{Inventory holding cost} = \frac{\text{inventory holding amount}}{\text{inventory value}} \times 100$$

Inventory holding cost example:

  • Inventory holding amount = $200,000
  • Inventory value = $800,000

Inventory holding cost = ($200,000 ÷ $800,000) × 100 = 25%

📌Get Started: Optimize your inventory levels and reduce overstocks. Use Singuli to replenish the right amount of stock at the right time so your inventory costs stay low.

21. Inventory Sell-Through Rate

Your inventory sell-through rate compares the quantity of stock you sell over a particular period to the stock you receive from your supplier. This shows you how quickly you sell a particular product.

$$\text{Inventory sell-through rate} = \frac{\text{units sold}}{\text{units received}} \times 100$$

Inventory sell-through rate example:

  • Units sold = 150
  • Units received = 250

Inventory sell-through rate = (150 ÷ 250) × 100 = 60%

22. Economic Order Quantity (EOQ)

To work out your EOQ, you need to know your order costs, your demand rate and your holding costs. This formula, also known as the Wilson formula, helps you calculate your ideal inventory quantity from an economic standpoint.

$$\text{EOQ} = \sqrt{\frac{2 \times \text{order costs} \times \text{demand rate}}{\text{holding costs}}}$$

EOQ example:

  • Order costs = $1,500
  • Demand rate = 400
  • Holding costs = $15,000

EOQ = √ [(2 × $1,500 × 400) ÷ $15,000] = 8.94 units

23. Stock Turnover

Stock turnover is the rate your inventory is sold over a specific time period. It looks at the full business cycle, from sales to shipping and payment.

$$\text{Stock turnover} = \frac{\text{value of SKUs (stock keeping unit) sold}}{\text{average stock value}}$$

Stock turnover example:

  • Value of SKUs sold = $2,400,000
  • Average stock = $400,000

Stock turnover = $2,400,000 ÷ $400,000 = 6

In this example, the business changes its stock 6 times in the given time period.

📌Get Started: Optimize your inventory levels and reduce overstocks. Use Singuli to replenish the right amount of stock at the right time so your inventory costs stay low.

24. ABC Analysis

ABC (always better control) analysis grades inventory items based on business importance to support inventory management. ABC analysis ranks stock from A to C, with A being the most important and C the least. Parameters for ranking inventory include demand, cost and risk data.

The idea is based on the Pareto Principle that says roughly 80% of results achieved can be correlated to 20% of output. The ABC analysis calculation works out the percentage impact for each item.

$$\text{ABC analysis} = \frac{\text{annual item revenue}}{\text{aggregated total of all items}} \times 100$$

ABC analysis example:

  • Annual item revenue = $30,000
  • Aggregated total of all items = $3.000,000

ABC analysis = ($30,000 ÷ $3,000,000) × 100 = 1%

In this example, we could say your item is a size S, red T-shirt in a clothing store. This t-shirt generates 1% of your store’s total revenue in the time period specified, so it can be categorized as C in ABC analysis.

💡Pro Tip: Give context to your sales history with Singuli’s ABC reporting and make it part of your wider inventory planning.

25. Forward Stock Cover

Your forward stock cover or forward on hand inventory (OH) measures how long your current stock OH will cover future sales periods. It’s important to understand this to avoid overstocks and stockouts but just like forward WOS, there are inaccuracies with forward stock cover.

To work it out, you need your current OH and your average COGS for a specified number of upcoming months. The conclusion of your formula tells you how many months your OH stock covers.

$$\text{Forward stock cover} = \frac{\text{current OH}}{\text{average forward COGS}}$$

Forward stock cover example:

  • Current OH - $300,000
  • Average forward COGS (over 6 months) - $60,000

Forward stock cover = $300,000 ÷ $60,000 = 5 months

26. Weeks of Supply (WOS)

Weeks of supply (WOS) is one way of comparing your current inventory with anticipated demand. Although the accuracy of this method is questionable, it’s still worth understanding how it works. You’ll need to know your forward on hand inventory (forward stock cover) and your forward weekly sales velocity (WV). Forward WV is the same as forward DV (daily sales velocity) but uses weeks, instead of days. We recommend using forward WOS instead of backwards WOS for more accuracy:

$$\text{Forward WOS} = \frac{\text{forward on hand inventory (OH)}}{\text{forward weekly sales velocity (WV)}}$$

Forward WOS example:

  • Forward OH = 1,200
  • Forward WV = 150

Forward WOS = 1,200 ÷ 150 = 8

27. Shrinkage

If you have less inventory than your recorded quantities, you have inventory shrinkage. This is relatively normal in business in low quantities but a high inventory shrinkage rate can signify larger problems.

$$\text{Shrinkage} = \frac{\text{recorded inventory} - \text{actual inventory}}{\text{recorded inventory}} \times 100$$

Shrinkage example:

  • Recorded inventory = $500,000
  • Actual inventory = $450,000

Shrinkage = [($500,000 - $450,000) ÷ $500,000] × 100 = 10%

Automate Inventory Formulas with the Right Software

Inventory formulas are vital for keeping your business running and growing. The right formulas used at the right time can help you predict incoming inventory (even for new products), avoid stockouts and overstocks and optimize your inventory. But it’s difficult to keep on top of which formulas are relevant when and how to use them. The solution is to automate inventory formulas with the right software.

Inventory Formulas FAQ

What is the Formula Used For Inventory?

For beginning inventory, start by working out the cost of goods sold (COGS). Then, take the most recent ending inventory value and subtract any funds spent on new inventory purchases.

$$\text{Beginning inventory} = \text{COGS} + \text{ending inventory} - \text{purchase costs}$$

What are the 4 Types of Inventory?

There are four main types of inventory:

  1. Raw materials/components
  2. Work in progress (WIP)
  3. Finished goods
  4. Maintenance, repair, and operations (MRO)

What are the Main Inventory Problems for E-commerce and Retail Businesses?

There are lots of challenges with inventory for e-commerce and retail businesses but two of the biggest problems are overstocks and stockouts. They both have short-term and long-term costs and cause reputational damage.

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We’re a multidisciplinary team of engineers, ph.d. researchers and data scientists with decades of retail experience.
Benjamin Kelly, Ph.D
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