Basic Formulas in Managing your Inventory

August, 2020

Knowing the fundamentals and basic formula in Inventory Management can help you get the data that you need. Aside from that, it can also give you a good idea of how to do things properly in your business. The objective of all these processes is for you to better manage your inventory.

Going automated with all your processes might make you think that you do not need to know this formula anymore since the software will do it for you, but it never hurts someone to know the basics. Especially, if it is about your business and you would want to be successful with what you do.

Let’s discuss the basic Inventory Formula:

Average Monthly Inventory

This formula is for you to be able to have an estimate of how many you have on hand in your inventory in a month, semester, or year. By using the average monthly inventory, you can get this information and use it to improve your inventory management. Learn More on WAOConnect.

Average Monthly Inventory = (Inventory at the beginning of the month + Inventory at the end of the month) /2

Maximum Stock Level

As the name implies, it is the limit you can order on a certain product for your inventory. This can be influenced by several factors such as; if the product is perishable, the available space in your warehouse, the preference of your consumers, and many more. Learn More on WAOConnect.

Maximum Stock Level = Reorder level + Reorder Quantity – (Minimum Consumption x Minimum Reordering Period)

Reorder Level or Reorder Level

This prompts you to raise a purchase order for the product. This is to make sure that the stock of the product remains above the minimum stock level. Monitoring the Reorder level is important for you to prevent your product from going out-of-stock and continue to serve your customers. To calculate the reorder level, simply multiply the daily consumption rate by the lead time in days of an item in your inventory. Learn More on WAOConnect.

Reorder Level = Daily Consumption x Lead Time

Inventory Turnover Ratio

Also known as Stock turnover, Stock turn, or Inventory turns ratio, is a method to measure how many times the entire product in your inventory have been replaced by new stocks in a given time period. Learn More on WAOConnect.

Inventory Turnover = Cost of Goods Sold (COGS)/Average Inventory

Safety Stock

This describes the quantity of extra stock you maintain in your inventory. The intention of having a Safety stock is to prevent the possibility of having a product in your inventory to go out-of-stock and allow your business to operate without any delays. This addresses the uncertainties that are present in supply and demand.. Learn More on WAOConnect.

Safety Stock = (Maximum Daily Usage x Maximum Lead Time in days) – (Average Daily Usage x Average Lead Time in days)

Average Monthly Sales

To get an idea of the average performance of your business on a month per month basis, this is what you have to do. Get the total sales performance of your business for the year and divide it by 12.. Learn More on WAOConnect.

Average Monthly Sales = Total Number of Products sold in a year / 12

Critical Level

The Critical level is defined as the lowest possible amount of a product you must keep on hand. Access to this information is important for your business to run effectively. It is crucial in maintaining the inventory costs as low as it can possibly while fulfilling all sales. Learn More on WAOConnect.

Critical Level = (Monthly Order Quantity + Safety Stock) /2

These are some of the formulae to better manage your inventory. Although when we say formula it does not always need to mean computation and numbers. The methods or techniques that you choose to manage your inventory, these can also be your own formula to sustain your operation and operate at optimal levels.

Even the systems that you have in place can be an answer to a problem. That is why you also need to take into consideration what software you are getting to maximize your business’ potential and make the process easier for you.

If you are still having trouble, there is a solutions provider that can help you and train you to better understand the concepts and applications of inventory management. That is who we are, at WhichAddOn, our objective is to educate business owners and equip you with the skills you need to keep your business competitive and up-to-date with the market. You can visit us at to know more.

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