Tracking and analyzing key metrics about your dealership can help you make more informed, impactful business decisions. Inventory turnover is one of the key ratios every dealership owner should calculate and track for cash flow insights. How long are vehicles sitting on the lot? How much does it cost to keep and maintain them until they sell? Improving turnaround times frees up capital for other uses by trimming costs related to financing, insurance, warehousing, and depreciation.
Using data to better understand your dealership’s flow can also inform your inventory acquisition practices. The more you invest in stocking your lot with popular models, the faster they’ll sell—and the happier your customers will be. Use this guide to learn the ins and outs of calculating inventory turnover, as well as industry benchmarks for comparing your dealership’s ratio.
What Is Inventory Turnover?
Inventory turnover is a ratio that describes how often you sell and replace your inventory over a given period.1 You and your sales managers probably spend a lot of time considering your inventory turnover, possibly without even using the term. You’re typically looking at annual inventory turnover, possibly quarterly and monthly, too. The goal is to increase this metric, which means you’re selling and replacing inventory faster.
How to Find Your Inventory Turnover Ratio
Finding your inventory turnover is a matter of doing some basic math. It will require a few equations and some data points about your dealership, so gather all the information before sitting down to do your calculations.
1. Calculate Your Average Inventory Value
The first step to determining your inventory turnover ratio is calculating your average inventory value for the period you’re interested in. This value tells you how much inventory you should have in stock to reach your sales goals. The higher the value, the more likely you are to increase profit margins.
For example, if you want your inventory turnover ratio for the past calendar year, you need the average inventory value over the last year. You’d calculate the average inventory value by adding the end-of-month inventory values for the past 12 months and divide the sum by 12.
The general formula for average inventory value is:
Average inventory value = (sum of inventory values for time period / time period)
2. Calculate Your Cost of Goods Sold
Your cost of goods sold, also known as the cost of sales, is the total value of all the inventory you sold in the given period. If you use digital dealership analytics and reporting tools like ACV MAX, the software may already calculate your cost of goods sold for you. If not, take your retail sales for the time period minus your front-end retail gross to find your cost of goods sold.
Cost of Goods Sold= Your Total Retail Sales - Front-End Retail Gross
Another way to calculate your cost of goods sold is to add the total value of your beginning inventory and any inventory purchased and subtract any inventory that remains to be sold. See the formula below.
Cost of Goods Sold = Beginning Inventory Value + Value of Any Inventory Purchased during the period - Ending Inventory Value
Suppose you are trying to look at the cost of goods sold for a full year using this method. In that case, you can take the beginning inventory value one year ago, add the value of all new inventory received during the year, and subtract the value of your current inventory left on the lot to get the cost of goods sold over the last 12 months.
3. Plug in Your Numbers to Calculate Inventory Turnover
Now that you have the cost of goods sold and average inventory value, you are ready to calculate the inventory turnover ratio. The basic equation is as follows:
Inventory turnover ratio = cost of goods sold / average inventory value
Include your most recent average inventory value in the calculation. If your inventory turnover increased with your most recent data, that’s a good sign you’re on the right track.
Try it!
Cost of goods sold
/ Average inventory value
= Inventory turnover ratio
___
Calculate!
4. Calculate Your Days Sales of Inventory
With your inventory turnover ratio, you can also calculate your days sales of inventory. This number tells you how many days your dealership takes to sell a given inventory. The formula for that is as follows:
Days sales of inventory = 365 / inventory turnover ratio
Try it!
365 / inventory turnover ratio
= Days sales of inventory
___
Calculate!
What's a Good Inventory Turnover Ratio?
Inventory turnover is just one piece of the picture when it comes to dealership profitability. You want to keep turnover high, but every dealership will have a different number that works for them. An inventory ratio of 12 is the gold standard, meaning you turn over your inventory every 30 days. The average for U.S. auto dealers was less than half that in 2022, turning over their inventory every 63 days instead.2 Specialty cars may have to have a lower turn number, while higher volume dealers may be able to maintain a higher turn.
In 2024, used and new cars have slowed down from pandemic highs. The total new-vehicle inventory is over 2.5 million units, which is equal to a 71-day supply—the highest in two years.3 So, understand that changing market conditions can significantly affect your inventory turnover ratio.
Moving Your Inventory With Better Merchandising
Staying on top of your inventory and all these calculations can get overwhelming. There’s a better way. Upgrade your inventory management with the full suite of ACV MAX tools. They include automated merchandising to help make your vehicles more visible, analytics, reporting, and precision pricing tools. With ACV MAX, you’ll be able to improve your inventory turnover in no time.
Get in touch with ACV MAX today to schedule a demo of any of our solutions and see how they can help your dealership.
Sources:
- Fernando, J. (16 September 2024). Inventory Turnover Ratio: What It Is, How It Works, and Formula. Investopedia. Retrieved 26 November 2024, from https://www.investopedia.com/terms/i/inventoryturnover.asp
- Inventory turnover days breakdown by industry. ReadyRatios. Retrieved 26 November 2024, from https://www.readyratios.com/sec/ratio/inventory-turnover/
- New-Vehicle Inventory Surpasses 2.5 Million Units, 71 Days’ Supply. Cox Automotive. Retrieved 26 November 2024, from https://www.coxautoinc.com/market-insights/new-vehicle-inventory-november-2023/
