As an ecommerce business owner, you know the delicate balance involved in keeping just the right amount of inventory in stock. Too much, and your products languish in back rooms and warehouses, eating into profits through carrying costs and frozen capital. Too little, and you run the risk of stockouts frustrating customers and forcing you into hasty purchase orders from suppliers—assuming they have the goods on hand.
Instead of crossing your fingers or relying on gut feelings, track your stock-to-sales ratio to find an inventory equilibrium and keep your ecommerce business running smoothly.
What is a stock-to-sales ratio?
Stock-to-sales ratio is a metric that shows how many months of inventory you’re holding compared to your monthly sales volume. This number reveals whether you’ve struck a balance between having enough goods to meet customer demand without drowning in costly excess stock. When your ratio runs too low, you risk stockouts and disappointed customers. A high ratio can also signal trouble—pointing to either excess inventory sitting idle or sales underperformance.
There’s no absolute definition of what makes a good or bad stock-to-sales ratio because it varies widely by business type and industry. For example, a food retailer selling goods with short expiration dates needs a much lower ratio than a manufacturing company selling steel nuts and bolts that can sit on shelves for years without losing value. Armed with a stock-to-sales ratio tailored to your business, you can make smarter decisions about when to order new stock or run promotions to clear inventory.
How to calculate stock-to-sales ratio
Working out your stock-to-sales ratio is simple. First, gather your inputs:
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Average inventory value: Add up the dollar value of your total inventory at the beginning and end of your measurement period (typically, monthly), then divide by two. This smooths out any unusual spikes or dips in your stock levels.
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Net sales: Your gross sales for that period, minus any returns and discounts.
Once you have your inputs, enter them into this formula:
Stock-to-sales ratio = average inventory value / net sales
Ecommerce calculation example
Let’s say you run a modest ecommerce brand specializing in handcrafted scented candles. You want to check your ratio for March to see if you’re stocking efficiently.
Your beginning inventory on March 1 was valued at $15,000 and your ending inventory on March 31 was $21,000. That gives you an average inventory value of $18,000, while your net sales for March came to $4,000 after processing a handful of returns. The ratio is calculated as follows:
Stock-to-sales ratio = $18,000 / $4,000 = 4.5
This ratio shows you’re holding about four and a half months’ worth of inventory. If a large portion of your candles are geared to short seasonal occasions, this ratio probably is too high. Based on this information, you might want to start planning a spring sale to clear out winter holiday stock before it loses value.
Stock-to-sales ratio vs. inventory turnover ratio
The stock-to-sales ratio is just one piece of the inventory management puzzle. Another metric worth understanding is inventory turnover ratio, which measures how many times you sell and replace your entire inventory during a specific period. This metric usually is calculated with the following formula:
Inventory turnover ratio = COGS / (starting inventory + ending inventory / 2)
Here are the numbers you need to calculate inventory turnover ratio:
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Cost of goods sold (COGS): COGS is the total cost of all the goods you’ve sold in a period including direct material and labor costs but excluding expenses for marketing, sales team wages, and overhead.
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Average inventory: The sum of your starting and ending inventory values divided by two, which helps smooth out any seasonal spikes.
Although both inventory turnover and stock-to-sales ratios help you gauge inventory health, they tell slightly different stories. The stock-to-sales ratio gives you a snapshot of your current inventory position relative to monthly sales and helps with immediate stocking decisions.
Your inventory turnover ratio, on the other hand, shows how efficiently you’re cycling through inventory over time. It gives you a broader view of how well you’re managing inventory over the long haul. Ideally, keep an eye on both metrics for a more complete picture of inventory management.
Stock-to-sales ratio FAQ
Why is my stock-to-sales ratio important?
Your stock-to-sales ratio directly affects customer satisfaction by helping you maintain the right amount of inventory to meet demand while avoiding stockouts. The ratio helps identify when you need to focus on sales growth or adjust inventory levels, signaling whether to launch promotions to move excess stock or increase marketing to boost sluggish sales.
What is the difference between stock-to-sales ratio and daily inventory sales?
Your stock-to-sales ratio shows monthly inventory health, while daily inventory sales tracks your day-by-day sales against stock levels. Stock-to-sales ratio gives you a broader monthly view to plan ahead, while daily inventory sales helps you catch immediate stocking issues.
How can you improve your stock-to-sales ratio?
To lower your ratio, cut your inventory levels through clearance sales and order smaller quantities more frequently. To raise your ratio, ramp up your marketing campaigns to boost sales and explore ways to reduce stockouts through better forecasting.
What is a healthy inventory-to-sales ratio?
What counts as healthy for a stock-to-sales ratio varies across business types—from fast fashion retailers that need rapid turnover to specialty bookstores that maintain a large stock. The best approach is tracking your stock-to-sales ratio over several months to establish a baseline that works for your business model.
