How is the formula for determining months of inventory stocked calculated?

The formula for determining months of inventory stocked is calculated by dividing the total number of months in a year by the turnover rate. This calculation provides insights into how long it would take to sell off the current inventory based on the sales velocity represented by the turnover rate.

The turnover rate is typically calculated by taking the cost of goods sold (COGS) and dividing it by the average inventory over a specific period. Thus, when you divide the number of months in a year by the turnover rate, you effectively convert that ratio into a time frame (months) that indicates the average duration for which the inventory is retained before it is sold.

This information is vital for inventory management as it helps businesses understand their inventory levels and sales patterns, allowing them to make informed decisions about ordering and stock levels. If the months of inventory are high, it may indicate overstocking, whereas low months of inventory could suggest good sales performance or insufficient inventory.