Why Average Inventory Matters

No inventory = no sales.

Too much inventory = lost profits.

Much like the porridge of Goldilocks' fame, companies must get inventory levels “just right.”

If purchases exceed incoming and stored inventory, businesses face stockouts and customer frustration. If goods sit on shelves without being purchased, warehouses and distributors are paying to store products that aren’t generating money.

As a result, it’s critical to measure and track your average inventory — how much of a particular product you have over time. Calculating and tracking these metrics can help companies better understand supply and demand and find their just right level of inventory stock.

But how do you calculate average inventory, and how do you apply it in practice? In this piece, we’ll offer insight and advice on making the most of average inventory metrics.

What Is Average Inventory?

Average inventory measures the number or value of goods in your inventory over two (or more) time periods.

This metric helps track the movement of inventory over time, which can help inform new buying and sales strategies. For example, if average inventory is steadily declining period after period, it may indicate the need for more stock. If average inventory remains the same or increases, this may suggest falling consumer demand.

It’s worth noting that average inventory is distinct from similar metrics such as ending inventory and current inventory.

Ending inventory measures the value of stock left at the end of a set fiscal period, such as a quarter or a year. It is calculated by adding your beginning-of-period inventory with any net purchases, and then subtracting the average cost of goods sold (COGS). This number helps companies better understand both changes and profitability in their inventory system.

Current inventory is a measure of how much stock you have on hand. It can be calculated daily, weekly, or monthly. On its own, the current inventory doesn’t offer much insight. Calculated over time, however, this metric shows net gain or inventory loss, which in turn helps companies better understand supply and demand.

How to Calculate Average Inventory

The formula for average inventory calculation is:

Average inventory = (Inventory for period 1 + Inventory for period 2) / Number of Periods

The most common number of average inventory periods is two. These periods could be the beginning and end of a week, month, or quarter. You can also use this formula to track inventory over multiple months, which allows you to track what’s known as your moving average inventory.

Here’s what the formula looks like for a one-month average:

Average inventory = (Beginning inventory + Closing inventory)/2

This calculation may be completed using either inventory units or inventory value.

Real-World Example of Calculating Average Inventory

Let’s take a look at a real-world example of the average inventory formula.

Company A wants to calculate its average inventory over one month. To get this answer, they need the value of inventory units at the start of the month and the value of all remaining inventory units at the end of the month.

Here are their numbers:

While it’s possible to manually calculate these numbers yourself every month, it’s often easier (and more accurate) to use automated solutions such as warehouse management systems (WMS) or enterprise resource planning (ERP) tools.

Why Knowing Your Average Inventory Is Valuable

There are several reasons why knowing your average inventory balance is valuable, including:

• Calculating inventory turnover — Understanding inventory turnover ratios helps you determine what stock levels you need and how often stock should be reordered.
• Improving cash flow management — Spending on inventory that doesn’t sell hurts your cash flow. The more you know about average turnover, the better you can manage both income and spending and determine your ideal economic order quantity (EOQ), which pinpoints the balance between maximum profitability and minimum inventory costs.
• Informing storage space optimization — Average inventory cost analysis helps you determine if value totals are increasing, decreasing, or remaining constant. If levels are decreasing, you may be able to save on warehouse space. If they are increasing, you may need to spend on more
• Supporting demand planning and financial modeling — Calculating inventory averages over multiple time periods, including monthly, quarterly, and yearly, can help you pinpoint both short and long-term trends. This lets you better understand customer demand and financial modeling, and purchase strategies that keep high-demand items in stock.

Challenges and Considerations in Tracking Inventory Averages

It’s also worth being prepared for possible challenges that come with tracking inventory averages, such as:

• Inaccurate ending or beginning counts — If counts are inaccurate, so are averages. Acting on inaccurate results can lead to excessive inventory or stockouts that hurt your bottom line.
• Seasonal spikes that skew data — Averages are useful in context. For example, if you calculate an average using data from a seasonal sales spike, this context matters. Averages for the rest of the year won’t match this data, meaning it’s not useful for long-term planning in isolation.
• Differences in SKU-level or value-based tracking — Different types of warehousing offer different approaches to SKU and value-based tracking. If you’re using multiple warehousing types simultaneously, it may be difficult to get accurate inventory costs and counts.

A Smarter Way to Manage Inventory

Average inventory levels are more than just a metric — they offer key business insights that help track sales trends to increase profitability and inform long-term strategy.

For this metric to be effective, however, the data used must be both reliable and accurate. Midwest AWD offers multiple warehousing frameworks to help meet your specific needs and streamline tracking processes. With Midwest AWD, you get the benefit of industry expertise and expert support to help ensure complete inventory visibility and enhanced inventory management.

Ready to get the most from your average inventory calculations? Contact Midwest AWD today.