Inventory Management 5 min read
The Correct Way For Calculating Stock to Sales Ratio
July 19, 2022 by Srishti Arora - 5 min read
The eCommerce market today is constantly evolving. This means that the stock purchase for one month might either be sold too early, or some of it might be left for you to carry forward in the next month. However, if it is sold entirely by the end of the month, it is a win-win situation for you. This is the stock-to-sales ratio, and eCommerce sellers worldwide aim to achieve a perfect stock-to-sales ratio for their eCommerce sales.
The stock-to-sales ratio is a vital inventory management matrix that helps you optimize your supply chain operations and gives you an idea about how much you need to stock up so that you don’t have a very high expenditure on holding costs or you don’t run into embarrassing situations like stockouts.
Let’s look at what stock to sales ratio is and how you can calculate it in the correct format.
What is Stock to Sales Ratio?
The stock to sales ratio, also known as an inventory to sales ratio, calculates the value of your inventory concerning the sales value in a particular period.
It is an essential inventory management KPI that helps you understand how soon your stock is selling and how much money you have invested in your inventory on average.
A low ratio is better when discussing the inventory to sales ratio or stock to sales ratio.
Importance of Stock to Sales Ratio
Inventory management is a critical but diligent operation. As an eCommerce seller, you don’t want much of your capital to be spent on purchasing and holding inventory. However, you also don’t want situations where you do not have enough inventory or a stockout. This constant need to balance out a dead stock and stock out the situation and maintain a positive stock level demands you to increase KPIs that can help you determine the right action for your business.
When you track your stock-to-sales ratio regularly, you can gain insights into your stock levels and sales and decide on the right approach towards selling, purchasing new stock, and determining trends that can help you make the right decisions.
Calculating the stock-to-sales ratio and tracking it regularly can also help you with demand forecasting as it gives you an idea about how your sales are doing concerning the inventory you purchase.
The Formula for Calculating Stock to Sales Ratio
Stock to sales ratio is calculated as –
Stock to sales ratio = Average stock value / Net sales value
Average stock value
To calculate your average stock value, you can add the beginning inventory value with the ending inventory value and divide the sum by two.
Average stock value = (Beginning inventory + Ending inventory) / 2
is calculated by subtracting the gross sales from the total returned sales.
Net sales = Gross sales – Sales returns.
Let’s understand this formula with an example –
Let’s assume that you sell Tote bags. The bags are Rs.500, and you sell them for Rs.1000. When you start sales at the beginning of October, you purchase 1000 pieces as your inventory, and by the end of October, you have only 100 pieces left. Out of the 900 sales, 50 were returned.
With this, we can calculate the average stock value as we have the beginning and ending inventory.
Average Stock Value = ([500*1000]+[100*500]) / 2
Average Stock Value = (5,00,000 + 50,000)/2
Average Stock Value = 2,75,000
Next, we need to calculate the net sales
Net Sales = [(900*1000) – (50*1000)]
Net Sales = 9,00,000 – 50,000
Net Sales = 8,50,000
Stock to Sales Ratio = Average stock value / Net sales value
Stock to Sales Ratio = 2,75,000/8,50,000
Stock to Sales Ratio = 0.3235 or 32.35%
Comparing Stock to Sales Ratio and Inventory Turnover Ratio
By the name of it, stock to sales ratio and inventory turnover ratio may seem like the same thing. More often than not, sellers tend to use them interchangeably. However, they have slightly different meanings.
Let’s have a look at the few differences between the two metrics
|Stock to Sales Ratio||Inventory Turnover Ratio|
|Talks about the value/price of the inventory sold||Talks about the units /quantity of the goods sold|
|Compares the value of inventory wrt to the cost of the goods sold||Compares the number of units sold to the units bought|
|Deals with the capital involved in moving inventory||Deals with the goods and quantity involved with moving inventory|
How Can Shiprocket Fulfillment Help?
When you self-manage order fulfillment operations, managing inventory becomes a critical aspect of it. You need always to be aware of the units that have moved, how many are remaining, and how much you need to re-order. When you outsource these operations to a 3PL fulfillment provider like Shiprocket Fulfillment, we manage all the critical aspects of your order fulfillment supply chain.
Shiprocket Fulfillment has more than 35 WMS-enabled fulfillment centers across India. This means that all you need to do is send your inventory to offer payment centers, and we will handle operations like inventory management, warehouse management, order shipping, returns, etc. You can store inventory closer to customers and reduce the transit time considerably. This does not only help you maintain a suitable stock-to-sales ratio, but it also puts you out of the situation of managing it actively.
The stock to sales ratio is a vital inventory management KPI that you must track for your eCommerce business. It helps you determine how much cost you are putting into your inventory concerning the amount you are selling. Keep an eye out for it to ensure that your capital is in place and you are not overspending or underspending.