What Should the Inventory Ratio Be for Manufacturing?

by Jared Lewis, Demand Media
Inventory ratios provide an indication of company sales.

Inventory ratios provide an indication of company sales.

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The number of times that a business turns over or depletes its inventory in a given year is known as its inventory ratio. The inventory ratio can tell a small business owner how fast its products are moving out of the factory, providing an indication of company cash flow. The inventory ratio varies by industry.


The inventory ratio is a comparison between the cost of goods sold and the average inventory level. The calculation requires dividing the cost of goods sold by the average inventory level of a company throughout the course of a year. If the cost of goods sold for a company was $100,000, and its average inventory value was $50,000, it would have an inventory ratio of 2.0 or $100,000/$50,000.


The inventory ratio for manufacturing typically ranges from 1 to 2 on a national scale. According to the Census Bureau, the inventory ratio in all manufacturing sectors ranged from 1.21 to 1.39 from 2000 to 2010. The turnover ratio in the durable goods sector ranged from 1.40 to 1.82, while the ratios were lower in the nondurable goods sector at 0.91 to 1.14. Therefore, manufacturers should expect to maintain ratios in these general ranges.


Fluctuations in the inventory ratio can occur throughout the course of the year, so there is no definite way to ensure or predict what the ratio will be at any given time. The yearly figures provided by the Census Bureau provide a more accurate indication because they are based on a 12-month span of ratios. However, month-to-month fluctuations can help business owners see during which months inventory tends to move faster. For instance, higher ratios during summer months may indicate greater demand for a product during the warm months of the year.

Cash Flow

With turnover ratios ranging from 1.0 to 2.0 as a broad general range, manufacturers can keep an eye on their own inventory ratio to conduct cash flow analysis. The more that the manufacturer sees its inventory ratio approach the 2.0 mark, the more likely it is that company cash flow is good. Moving inventory means that money is changing hands and that the company does not have excess funds tied up in slowly moving products that are not being sold. Inventory ratios nearer to or under 1.0 may indicate some cash flow difficulties brought on by inventory that has piled up.

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