Inventory management is a daunting task when market fluctuations, rising order volumes, and global supply chain disruptions create constant (and often unpredictable) pressure.
Striking the right balance is more critical than ever. Ecommerce brands must avoid both stockouts and excess inventory, leading to a key inventory management KPI: inventory to sales ratio.
In this guide, we’ll show you how to calculate it, interpret it, and optimize it to strengthen your operations.
What Is The Inventory to Sales Ratio?
The inventory to sales ratio, also known as stock to sales ratio, compares the average inventory value to the average sales value and is one measure of a company’s inventory level health.
As a KPI, the ratio helps retailers gauge how quickly they’re moving stock and how much capital is tied up in inventory. While a lower ratio is generally better because it indicates faster sell-through and better cash flow, the goal isn’t simply to drive the ratio as low as possible.
Instead, brands should focus on identifying a healthy inventory to sales ratio that aligns with their business model and consistently meets consumer demand.
Why Is the Inventory to Sales Ratio Important for Businesses?
As the inventory or stock to sales ratio shows how quickly brands sell through their inventory, it’s a good indicator of the leanness of a brand’s supply chain.
That said, maintaining inventory levels can be a tricky balance. While brands don’t want to pay for excess storage, they also don’t want to face insufficient stock and miss out on sales. Teams also may face obsolete inventory, which poses another challenge.
If a brand determines its inventory to sales ratio is too low, that generally means stockouts and poor sales performance. On the other hand, an inventory to sales ratio that is too high generally means a brand is holding on to too much total inventory, facing overflow storage, and incurring excess storage fees.
In order to calculate a brand’s inventory to sales ratio, a brand needs to have a couple of other figures on hand. All of these figures can generally be found in the company’s income statement, balance sheet, and other financial statements.
The first part of calculating the inventory to sales ratio is to calculate the average stock value. Brands need to add their beginning inventory value and ending inventory value together, and then divide that sum by 2.
Average stock value = (Beginning inventory + Ending inventory) / 2
The second step is to calculate net sales, brands should calculate their gross sales valuation (total sales before discounts and returns) and subtract from it the value of all returned sales.
Net sales = Gross sales – Sales returns
The inventory to sales ratio can be calculated by dividing a brand’s average inventory value for a certain period of time by the net sales from that same period of time.
Inventory to sales ratio = Average stock value / Net sales value
How the Inventory to Sales Ratio Works
Inventory to sales ratio is best tracked over a long period to account for seasonal variations and to identify patterns. During that period, there are several factors to look out for, including the following:
- Sales volume: A sudden spike or drop in sales will immediately affect the ratio. Higher sales volumes typically lower the ratio, indicating faster turnover, while slower sales push the ratio higher.
- Inventory levels: Over-ordering, supply chain delays, or stocking up ahead of seasonal peaks can cause inventory to swell, raising the ratio. Conversely, leaner inventory management lowers the ratio.
- Cost of Goods Sold (COGS): While COGS doesn’t directly factor into the inventory to sales ratio, it can still influence it indirectly. For example, rising production costs or supplier prices may lead to price increases or slower sales. Both of which can affect the ratio over time. Additionally, COGS plays a key role in overall profitability, which often informs broader inventory and pricing strategies.
Because these variables can change frequently, tracking the inventory to sales ratio consistently over time gives brands a clearer, more actionable picture of inventory health rather than relying on one-off snapshots.
How To Interpret the Inventory to Sales Ratio
As mentioned earlier, the inventory to sales ratio is best calculated over a longer period of time, such as three to five years. If the inventory to sales ratio is only tracked for one year, seasonal fluctuations may skew the data and limit its value for forecasting.
Furthermore, there’s no universal ideal ratio. It varies by industry, business model, and sales cycle. That’s why each brand needs to benchmark against its own historical data to determine the inventory to sales ratio that best supports its growth and customer demand.
How To Manage Your Inventory Sales Ratio
Achieving and maintaining the right inventory to sales ratio can be challenging, especially in a fast-paced, ever-changing global market.
A solid inventory management strategy, as well as the technology to back it, is critical. The many factors that influence a brand’s inventory to sales ratio — sales volume, inventory levels, COGS — need to be tracked in real-time to give brands the best information possible to analyze and optimize.
Boost Your Inventory to Sales Ratio with Flowspace
Every growing ecommerce brand needs to track inventory management KPIs, such as inventory to sales ratio, inventory turnover, and inventory days on hand. Backed by best-in-class technology, a fulfillment partner can provide the tools you need to achieve this.
Flowspace’s platform streamlines fulfillment, from ordering and processing to packing and shipping. Our OmniFlow Visibility Suite provides real-time insights into key inventory KPIs and offers actionable recommendations to help brands improve efficiency.
With end-to-end visibility from fulfillment through delivery, you can stay ahead of low stock and make smarter safety stock decisions. Predictive analytics and inventory insights support stronger customer satisfaction, improved retention, and a healthier bottom line.
To see how our inventory management solutions can support your growth, get in touch with Flowspace today.
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