Average Inventory- Meaning and Calculation

By Annapoorna


Updated on: Apr 5th, 2022


3 min read

social iconssocial iconssocial iconssocial icons

Proper inventory stock management is essential for handling costs and enhancing customer experience. While excessive inventory indicates uncertainty and unnecessary capital blockage, you risk losing out on sales and opportunities with an insufficient inventory. Maintaining the correct inventory quantity is necessary for growing your business and managing aspects like operating costs, customer satisfaction, and sales.

What is the Average Inventory?

Inventory refers to the number of saleable products in hand or the quantity of raw material for manufacturing products. Average inventory is an approximate or estimated calculation of the quantity of inventory a company possesses over a specific period. Receivement of oversized shipments, a spike in sales, etc., can cause changes in the inventory balances at the month-end, as they replenish or deplete the inventory. Calculating the average inventory uniforms the surge on either side and provides a more reliable index of inventory availability.

Why is Average Inventory Important?

Several factors can cause fluctuations in inventory stock. While a large delivery can cause a spike in your inventory stock, a sale surge during a peak season can deplete your inventory. Fluctuations are especially evident in seasonal businesses. However, these factors are temporary, and you cannot depend on these temporary factors for deciding your inventory stock. This is why average inventory is important. 

  • Average inventory helps you strategically plan the quantity of stock you need to order for your business. 
  • It also helps track any loss of inventory due to inaccuracy, expiry, shrinkage, theft, or accidents. 
  • The inventory turnover ratio and the average inventory period can be of immense help in identifying and evaluating the period taken by your company to sell the inventory stock. 

Average Inventory Formula and Calculations

The average inventory formula is usually used for calculating the amount of inventory stock for two accounting periods. However, you can always increase or decrease the period using the same formula. You can increase the period by simply adding the inventory recorded at the end of every month in a year and dividing it by 12. Similarly, for shortening the time duration, you can add the inventory recorded at the starting of the month with the inventory recorded at the end of the month and simply divide it by 2.

Average Inventory = (Current Inventory + Previous Inventory) / Number of Periods

A company can use the average inventory formula to calculate the following ratios-

  • Inventory Turnover Ratio

Inventory Turnover Ratio reveals the rate at which a company has sold or restored stock within a given time frame. A high inventory ratio indicates the company’s success in selling the inventory stock and vice versa.

Inventory Stock = Cost of Goods Sold / Average Inventory

  • Average Inventory Period

The average inventory period differs across companies and products. It is used for calculating the period required for a company to sell out the inventory stock.

Average Inventory Period = No. of Days in Period / Inventory Turnover Ratio

Example of Average Inventory

Consider that a furniture company has a current inventory stock worth Rs.10,00,000. This is by the inventory stock of the previous three months worth Rs.7,00,000, Rs.5,00,000, and Rs.6,00,000, respectively. So, the average inventory for the furniture company will be calculated in the following manner-
Average Inventory = (10,00000 + 7,00000 + 5,00000 + 6,00000) / 4 = Rs.7,00,000

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more


Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use


ISO 27001

Data Center


SSL Certified Site

128-bit encryption