Business owners might recognize this situation: Just when you think you’ve got your inventory under control, something unexpected happens — a sudden spike in demand or a supplier that doesn’t deliver on time. Suddenly, you’re caught between insufficient stock to meet customer needs and overstocking, which ties up cash in unsold goods.
That’s where average inventory becomes a game-changer. You want enough inventory to keep customers happy without overburdening your business with excess stock that eats into your cash flow.
Understanding average inventory is key to making smarter, more informed decisions about your stock levels. It’s all about finding the balance that helps your business run efficiently, avoid stockouts, and keep cash flow healthy.
Average inventory explained
Average inventory is a valuable metric in inventory management that tells you how much stock you typically hold over a set period. Rather than just looking at a single point in time, like the amount of inventory you have at the end of the month, average inventory gives you a broader view by smoothing out fluctuations.
This metric is important because it provides insight into how efficiently you manage stock, especially as you compare it to sales data. With average inventory, you can see whether you’re holding too much, which ties up cash in inventory costs, or too little, which could lead to stockouts and missed sales opportunities.
For example, tracking average inventory over a year allows you to evaluate how much stock you need to meet demand each month. This helps you make better decisions on when and how much to reorder, ensuring you’re not overstocking or running into supply issues.
Understanding your average inventory is key to keeping your cash flow healthy and optimizing your stock levels. By knowing this figure, you can:
- Determine when and how much to reorder
- Avoid overstocking, which ties up cash in unsold goods
- Keep your cash flow healthy by preventing excessive inventory costs
- Ensure that you have enough stock on hand to meet customer demand without running out
In the end, tracking average inventory helps you maintain the perfect balance — enough stock to meet demand while avoiding excess inventory costs.
Understanding inventory turnover
To really get a handle on average inventory, it helps to first understand inventory turnover. Inventory turnover tells you how often you sell and replace your stock over a period of time, such as a month, quarter, or year. It’s a vital inventory management metric that shows whether your products are moving quickly or sitting idle on your shelves.
A high inventory turnover ratio usually means your sales are steady and you manage inventory efficiently. But if turnover is slow, it could be a red flag — maybe you’re overstocked, facing weak demand, or simply not moving products fast enough.
The basic formula to calculate inventory turnover is:
Inventory turnover ratio = Cost of goods sold / Average inventory
Notice how the inventory turnover ratio relies directly on knowing your average inventory. Without it, you can’t accurately calculate how efficiently you turn goods into sales.
Another metric worth paying attention to is days inventory outstanding (DIO). It tells you the average number of days your inventory sits on the shelf before selling. Lower DIO typically means you’re selling quickly, while a higher number suggests stock might be tying up capital for longer than necessary.
The importance of average inventory
Understanding average inventory gives you the clarity you need to make smarter decisions about restocking, which can significantly impact cash flow and overall efficiency.
Here’s why it matters:
- Keeps your cash flow healthy: Knowing average inventory allows you to avoid investing too much money in products that aren’t selling. Use that cash for other vital areas of your business.
- Prevents overstocking and stockouts: You don’t want too much stock sitting around collecting dust, but you also don’t want to run out of products. Average inventory helps you find that perfect balance to stock shelves without wasting money on storage costs.
- Boosts customer satisfaction: When you have the right amount of inventory, you can fulfill orders faster, keeping customers happy and encouraging repeat business.
- Helps you plan ahead: Regularly tracking average inventory offers insight into trends and patterns so you can better prepare for busy seasons or anticipate demand spikes.
Limitations of average inventory
While average inventory is a useful metric, it’s not without limitations. Here are a few things to keep in mind when relying on this data:
Doesn’t account for seasonality
Average inventory can sometimes overlook seasonal fluctuations in demand. For example, if you have high sales during the holidays, average inventory might look higher than usual, even though it doesn’t fully reflect the spikes and dips throughout the year.
Ignores product turnover rates
Not all products move at the same speed. Some may sell quickly, while others sit on the shelves for longer periods. Average inventory doesn’t distinguish between fast- and slow-moving stock, potentially leading to inaccurate insights for inventory management and purchasing decisions. There are other tools and reports you can use to reveal more complex sales data beyond what average inventory offers.
May not reflect real-time stock levels
If you’re using a perpetual inventory system, stock levels are constantly changing. Average inventory provides a snapshot over a set period, so it may not always reflect your real-time status, especially during times of rapid inventory movement.
Can mask issues with understocking or overstocking
If you have significant stock-level fluctuations, average inventory can sometimes smooth over those gaps. This might make it harder to identify when you’re dangerously close to running out of stock or carrying too much inventory.
How to calculate average inventory
Here’s a simple process to determine your average stock levels over a specific period:
1.Choose your time period
First, decide which period you want to analyze. This could be a month, a quarter, or a year.
Your chosen time frame should align with your business needs or reporting schedule. For instance, if you want to calculate the average inventory for your fiscal year, gather inventory data for all 12 months (or 13 months if your fiscal year starts mid-month). This helps you assess trends over a more meaningful period.
2. Collect your inventory data
For the selected period, gather your beginning inventory (the stock level at the start) and ending inventory (the stock level at the end). This data is typically available from your accounting or inventory management system. Make sure to capture inventory counts on specific dates for maximum accuracy.
3. Add beginning and ending inventory
Now, take the beginning inventory and ending inventory and add them together. This gives you the total amount of inventory you held during the period.
Remember that this total is just an aggregate of the two values you are using to calculate the average, so it reflects a basic snapshot of your stock levels.
4. Divide by the number of periods
To calculate the average inventory, divide the total from Step 3 by the number of periods you are analyzing. For a monthly calculation, divide by 2; for a yearly calculation, divide by 12 (or 13 for fiscal year). This gives you the average inventory for the period.
Here’s the formula to use:
Average inventory = Beginning inventory + Ending inventory / 2
If calculating for a more extended period, like a year, you might adjust the formula:
Average inventory = Sum of inventory at the end of each month / Number of months
5. Review the results
The result of this calculation is your average inventory for the period. This number shows how much inventory you had on hand on average during the time frame, giving you insight into what you need to meet customer demand. This can help you assess if your inventory levels are too high, too low, or just right for the period.
Let’s say you’re calculating the average inventory for the year’s first quarter. Here’s the data you have:
- Beginning inventory (start of January): $30,000
- Ending inventory (end of March): $50,000
Now, let’s calculate:
- Add beginning and ending inventory: $30,000 + $50,000 = $80,000
- Divide by 2 (for a quarterly calculation): $80,000 / 2 = $40,000
So, your average inventory for the first quarter would be $40,000.
When paired with other metrics — like the inventory turnover ratio — average inventory becomes even more powerful. And if you use inventory valuation methods like the weighted average cost inventory method, which assigns a consistent average cost to your inventory items, you get a more accurate view of your true stock value over time.
Optimize your inventory management with Fishbowl’s advanced tools
Getting your average inventory right is one of the smartest ways to cut costs and improve how your business runs. When you know how much stock you typically carry, you can avoid tying up cash in unsold products or scrambling to restock when shelves run dry. It’s the kind of insight that transforms inventory from a guessing game into a growth strategy.
Staying on top of your average inventory is key to running a smoother, more profitable business. But tracking and managing all that data manually? That’s where it gets tricky.
Fishbowl takes the stress out of inventory management. With smart, easy-to-use tools like the Turnover Report and visual dashboards, you can monitor your inventory turnover ratio and make faster, more confident decisions about what to stock and when to reorder.
If you’re ready to stop guessing and start growing, Fishbowl gives you everything you need to take control of your inventory — and your business. Book a demo today to see how Fishbowl can help you optimize your average inventory and stay ahead of the game.