Launching an ecommerce business comes with many responsibilities, but one of the most important is managing your inventory-to-sales ratio. Having a healthy ratio—where you have enough stock to cover your orders, but not so much that it costs you in stocking fees—can help your business thrive.
Read on to learn more about the inventory-to-sales ratio, including:
- What it is
- Why it matters
- How to calculate your ratio
- What can happen when your ratio is out of balance
- Tools you can use to manage your inventory in the Amazon store
What is an inventory-to-sales ratio?
An inventory-to-sales ratio—also known as a stock-to-sales ratio—is a metric that measures the amount of inventory you have compared to the number of orders being fulfilled. When you have just enough inventory to meet sales demands, this is reflected by a lower ratio—that’s what you want. But if you have too much stock compared to your sales, your ratio will be higher—and that could point to business issues.
Monitoring your inventory and calculating your ratio can help you achieve efficiency and optimize your business by identifying what works and what doesn’t. For example, having more stock than sales could point to an issue with product demand, which you may be able to solve by offering different products or ramping up marketing. Or if you know you sell out of a product during the holiday season, you can use past ratio indicators to help you determine how much stock you need to meet customer demand.
Why does my inventory-to-sales ratio matter?
Knowing your inventory-to-sales ratio is important to help you keep the right balance of inventory to meet customer demand. It can also help you understand how much you’ve invested in your inventory, and how that figure compares to your revenue. You don’t want to have too much of your finances tied up in stock, but you also don’t want to run out of stock and lose sales.
If your ratio is too low, that may mean you don’t have enough inventory to meet customer demand. You can course correct by investing in more product units. If your ratio is too high, that means you have too much inventory—and you’re probably spending too much on storage fees. To correct the imbalance, you can lower your inventory or find new ways to increase sales.
The more consistent you are in monitoring your ratio, the better you’ll get at investing the right amount in inventory and optimizing your sales strategy to help grow your business. It can also help you prepare your stock levels for busy shopping times, like the holidays, and stay flexible during changing market conditions.
It’s recommended to track your ratio over three to five years to get a clear picture of the ratio that works best for your business.
How do I calculate my inventory-to-sales ratio?
To calculate your inventory-to-sales ratio, start by selecting a period of time. This could be a few weeks, a sales quarter, or an entire year. Then divide your average inventory value by net sales for that time period.
For example, let’s say you sell flower pots and want to calculate your ratio for the past month. If the value of your inventory for that time is $500 and your net sales were $800, you’d divide $500 by $800 to get a ratio of 0.625.
If you’re not sure about the value of your inventory, you can calculate that too. Just multiply the number of units you have in stock by their price over a select period of time.
Lastly, if you need to calculate your net sales, find your gross sales and subtract the value of your returns.
In general, it’s recommended to keep your ratio between 0.167 and 0.25. But it’s not always about having the lowest ratio. This number can fluctuate over time and look different from one business to the next. The ratio that works for you depends on what best reflects your business’s health, which you’ll come to know over time the longer you track your ratio.
What percentage of my sales should be spent on inventory?
While there are different schools of thought on how to manage your inventory spend, there is no magic number that works for every business. That’s why calculating and monitoring your inventory-to-sales ratio is so important. Using your ratio as a guide, you’ll come to understand over time what percentage of your sales should be spent on stock. For example, if your ratio is too high, you may have spent too much on stock and should reduce your investment.
How to manage your inventory with Amazon fulfillment
If you’re an Amazon seller, there are ways you can simplify your inventory management and make it easier to monitor your inventory-to-sales ratio. You can enroll in Fulfillment by Amazon (FBA) or use Fulfilled by Merchant.
With FBA, you can outsource order fulfillment to Amazon and offer customers free, two-day shipping through Prime. Once you enroll, you can send your products into Amazon’s global fulfilment network and we’ll pick, pack, and ship orders on your behalf and handle customer service and returns. In addition to freeing up your time so you can focus on optimizing your business, FBA also offers valuable tools that can help you manage your inventory.
If you prefer to manage inventory and fulfillment yourself, Fulfilled by Merchant can also help align your stock levels and optimize order processing across multiple sales channels. Not only can you protect your selling account from delivery issues and choose the delivery options that best support customer needs, you also have access to unique tools to help manage your inventory with Amazon and other selling channels. You can use Fulfilled by Merchant for each product you sell, or you can some sell some products with Fulfilled by Merchant and others through FBA.
2 tools to help manage your inventory with FBA
There are two main inventory tools accessible through FBA:
1. FBA Dashboard
The FBA Dashboard gives you a summarized view of your sales, shipments, inventory and more. Your key performance indicator cards, displayed along the top of the page, show your FBA sales ordered, units ordered, order count, and FBA fees over a selected period of time. You’ll also see your Inventory Performance Index (IPI), which measures the efficiency of your inventory management with a score based on the following:
- Excess inventory: A unit is considered excess if it has over 90 days of supply based on forecasted demand.
- In-stock rate: The percentage of time products have been in stock over 30 days versus the number of units sold in 60 days.
- Sell-through: Units shipped over the past 90 days divided by the average number of units on hand.
- Stranded inventory: The percentage of FBA units that are currently not available for purchase in the Amazon store.
Using this score along with your inventory-to-sales ratio, you can see at a glance how efficiently you’re balancing your inventory so you can course correct as needed.
2. FBA Inventory page
The FBA Inventory page can assist with maintaining healthy inventory levels by helping you plan for the future, track inventory age, manage excess inventory, and fix stranded inventory. You can see your inventory health status, sales performance, fees, take recommended actions to address any issues, and more. The page also offers features you can use to download inventory reports, adjust the metrics you want to view, and filter products with similar inventory characteristics.
2 Fulfilled by Merchant tools to help you manage your inventory
There are two main inventory tools available to Fulfilled by Merchant sellers:
1. The Manage Inventory page
Use the Manage Inventory page to search, view, and update your product and inventory listings. To view your inventory, select Inventory from the main menu, then Manage All Inventory to see and sort your products by status, SKU, product name, and more. You can also select Manage Pricing from the top of the page to view your sales history.
2. Veeqo
Veeqo is a free multi-channel shipping service that lets you update inventory and simultaneously manage orders across multiple channels. You can get access to the lowest commercially available shipping rates and monitor your inventory using:
- Inventory syncing: Automatically sync inventory across multiple channels and stay informed on inventory health with Veeqo’s ongoing stock takes and low stock alerts.
- Analytics and forecasting: Track and organize all your sales data to make planning, purchasing, and optimization easier as you plan for the future.
- Automatic inventory management: Create pre-set rules to address fulfillment based on stock levels, and route orders to specific warehouses.
- Identifying high-margin products: Get clear data on each product showing what you paid, what you sold it for, and what your margin was.
