Understanding Your Inventory to Sales Ratio in Shopify
Published July 3, 2024.
The inventory to sales ratio, otherwise known as your stock to sales ratio, allows you to manage the amount of capital you invest in stock by measuring your inventory value against the value of your sales over a chosen time period.
Calculating Inventory to Sales Ratio
To calculate your inventory to sales ratio, you can use the following formula:
Inventory to Sales Ratio = Average Stock Value / Net Sales Value
Average Stock Value = [Beginning Stock Value + Ending Stock Value] / 2
Net Sales Value = Gross Sales Value - Return Sales Value
Practical Example
If your company sells t-shirts in Shopify and has the following metrics:
- Cost per t-shirt: $5
- End sales price per t-shirt: $15
- Starting stock: 150
- Ending Stock: 50
- Total sales: 100
- Total sales value: $1,500
- Total returns: 10
- Total returns value: $150
- Beginning stock value: $5 x 150 = $750
- Ending stock value: $5 x 50 = $250
To calculate your inventory to sales ratio, you can put the above information into the formula as follows:
Inventory to Sales Ratio = [($750 + $250) / 2] / ($1,500 - $150)
Inventory to Sales Ratio = [($1,000) / 2] / $1,350
Inventory to Sales Ratio = $500 / $1,350
Inventory to Sales Ratio = 0.37, or 37%
What's a Good Inventory to Sales Ratio?
As a rule of thumb, an ideal inventory to sales ratio is between 0.167 and 0.25.
A higher ratio could indicate you're overstocked (as in the example above), while a lower ratio could indicate the need to keep a larger inventory. Shopify offers a built-in automated inventory management option, or multiple inventory management apps are available that can integrate with Shopify.