The determination of the typical level of goods held within a business over a specific period is achieved through a straightforward calculation. The sum of the inventory value at the start of the period and the inventory value at the end of the period is divided by two. For example, if a company began the year with $10,000 worth of merchandise and ended the year with $12,000 worth of merchandise, the calculated value would be $11,000. ($10,000 + $12,000) / 2 = $11,000.
This metric provides valuable insights into a company’s inventory management efficiency. It assists in assessing the effectiveness of purchasing and sales strategies, informing decisions related to production levels, storage requirements, and working capital allocation. Historically, businesses relied on manual counts and record-keeping. Modern accounting software automates the process, increasing accuracy and efficiency.