Inventory accounting, the process of tracking and valuing inventory and its effect on a company’s balance sheet, relies on several key metrics. Metrics such as Inventory Aging, Inventory Turnover, Gross Margin by Item, and Carrying Cost provide powerful insights that help optimize stock levels, reduce costs, and increase profitability.

However, with so many data points available, executives and warehouse managers can easily become overwhelmed. The key to success lies in identifying which metrics have the most significant impact on financial performance and operational efficiency. While priorities may vary by business type and industry, the following 8 inventory accounting metrics represent the most essential indicators every company should monitor closely.

The Goals of Inventory Accounting Metrics

Before diving into specific metrics, it’s important to understand the main objectives of inventory analysis. The overall goal is to boost inventory efficiency, ensuring that the right products are available at the right time, without tying up excess cash or wasting resources.

Breaking this down further, effective inventory analysis aims to:

Identify improvement areas: Compare current metrics with past results and industry benchmarks to spot inefficiencies or problem areas.
Reduce stockouts: Stockouts can lead to lost sales and disappointed customers. Analyzing inventory helps minimize these situations and ensures smoother operations.
Improve cash flow: Tracking inventory levels prevents too much capital from being tied up in stock, allowing healthier cash flow for other business needs.
Cut down on waste: Regular analysis helps reduce shrinkage, including lost, stolen, or damaged goods, improving both accuracy and profitability.

Ultimately, strong inventory analysis leads to better financial performance and a smoother customer experience, helping businesses stay both efficient and competitive.

ABC Analysis

ABC analysis is one of the most widely used inventory analysis techniques, designed to help businesses identify their most valuable inventory items. The method is based on the Pareto Principle, also known as the 80/20 rule. In retail terms, this principle suggests that roughly 80% of total sales or profits usually come from about 20% of a company’s inventory.

ABC analysis applies this concept by categorizing inventory into three distinct groups:

A Inventory

These are high-value items that typically represent around 20% of total stock but generate roughly 80% of sales or profits. They often have strong profit margins and require close monitoring to prevent stockouts.

B Inventory

These products sell regularly but contribute less to overall revenue than A items. They may have slimmer margins or higher holding costs, but are still important to day-to-day operations.

C Inventory

The remaining items that sell infrequently or contribute the least to total revenue. These products are lower in value and usually require minimal management attention.

By using ABC analysis, businesses can focus their time and resources on the inventory that has the greatest impact on profitability. A-level items should receive the highest priority to ensure they’re always in stock, while C-level items can be managed more efficiently with less oversight.

8 Inventory Accounting Metrics

While ABC analysis is a useful way to identify high-value inventory, it’s not the only method available. Several other key inventory metrics can help evaluate performance, track efficiency, and reveal opportunities to improve warehouse operations and overall profitability.

1) Inventory Turnover

Inventory turnover measures how often products are sold and replaced during a set time period, typically one year. A high turnover rate means products are selling quickly, and sales performance is strong. A low turnover rate can indicate that the business is holding too much inventory, suggesting a need to cut back on orders or reassess product demand to reduce carrying costs.

A related metric is average days to sell, which shows how long it takes on average to sell a product and how many days of sales are currently held in inventory. A low average days to sell is usually positive, though it can lead to stockouts and poor customer experience. On the other hand, high average days to sell may point to overstocking and wasted warehouse or shelf space.

2) Gross Margin Return on Investment (GMROI)

GMROI is a simple ratio that measures how profitable your inventory is over a specific period. It shows how much gross profit a retailer earns for every dollar spent on inventory.

Formula:

GMROI = Gross Margin ÷ Average Inventory Cost

(Note: Gross margin is calculated by subtracting COGS from net sales.)

A GMROI below 1.0 means the gross profit generated from inventory doesn’t cover its cost, signaling inefficient use of inventory investment. A GMROI above 1.0 means the business is making more than it spends to buy inventory.

Keep in mind, GMROI doesn’t measure total profitability, since it only considers COGS and not all business expenses. Still, it gives a strong picture of how effective your pricing and purchasing strategies are in generating profit from your inventory.

3) Inventory Carrying Cost

Inventory carrying cost, also called holding cost, includes all the expenses related to storing and maintaining inventory. These costs cover warehouse rent, maintenance, and utilities, as well as losses from shrinkage, leakage, spoilage, or product obsolescence. Financial costs are also included, such as insurance, inventory management software, and the opportunity cost of having money tied up in unsold goods.

Carrying cost is usually calculated annually and expressed as a percentage of total inventory value. For example, if a business holds $100,000 worth of inventory and spends $20,000 maintaining it, the carrying cost equals 20%. This percentage can vary widely depending on the type of business, product characteristics, and customer demand.

Some companies measure carrying cost as a percentage of revenue. According to a study by the Supply Chain Consortium, manufacturers averaged about 2.25%, retailers around 1.8%, and top-performing companies as little as 0.5%.

4) Inventory Write-Off

Inventory write-off measures the value of unsold inventory that has become obsolete or unusable over a given period. This typically occurs due to product damage, theft, loss, or obsolescence that renders the goods unsellable.

The process involves identifying the affected inventory, disposing of it properly, and formally writing off its value in the company’s accounting records. While not a metric with a specific formula, it’s an important indicator of operational efficiency and inventory control.

Regularly reviewing and tracking write-offs can reveal underlying issues such as poor demand forecasting, over-ordering, or improper storage practices. A consistently high or rising inventory write-off value is a red flag that warrants immediate investigation to prevent unnecessary financial losses.

5) Sell-Through Rate

Sell-through rate measures how much of your received inventory is actually sold over a specific period, expressed as a percentage. It’s a key indicator of product performance and inventory efficiency, showing how quickly stock is moving off the shelves.

This metric can be applied on a per-product or per-variant basis to assess how fast investments in inventory are generating returns. It’s also valuable for comparing performance across different products, time periods, or sales channels.

Low sell-through rates often signal over-purchasing or overly high pricing, while high sell-through rates can indicate under-purchasing or pricing that’s too low. Regularly tracking sell-through rates helps ensure a healthy balance between supply and demand, improving inventory planning and profitability.

6) Days Inventory Outstanding (DOI)

Days Inventory Outstanding (DOI) measures how long it typically takes for inventory to be created or purchased and then sold. It’s often called the “average days to sell” and helps gauge how efficiently a company is converting inventory into revenue.

The formula divides the average cost of inventory during a specific period by the cost of goods sold (COGS) for the same period, then multiplies by the number of days in that period, typically one year.

A single DOI calculation doesn’t tell the full story, but tracking trends over time can reveal valuable insights. Increasing DOI values or consistently poor performance may point to issues in production, purchasing, or sales processes. Comparing your DOI to industry benchmarks can also help identify whether your inventory management is competitive or needs improvement.

7) Back Order Rate

Back order rate measures the percentage of total orders placed during a given period that could not be fulfilled immediately and had to be back-ordered. This metric provides insight into how accurately a business forecasts demand, replenishes stock, and tracks inventory levels.

A high back order rate can indicate several issues, such as purchasing insufficient inventory, reordering too late, or failing to properly synchronize inventory across multiple sales channels. These inefficiencies can disrupt operations and frustrate customers.

It’s also important to recognize that this metric doesn’t capture lost sales. Even if your back order rate is zero, you might still miss revenue opportunities if products are frequently listed as “out of stock” or “pre-sale” online. Tracking this metric alongside lost sales helps reveal the true effectiveness of your inventory management.

8) Inventory Aging

Also known as Average Age of Inventory, this metric measures how long, on average, it takes to sell inventory. It’s calculated by dividing the cost of inventory by the cost of goods sold (COGS) and multiplying by 365.

The longer inventory sits unsold, the more it costs the business both in storage expenses and potential depreciation. High inventory age can signal that products are overpriced, outdated, or in low demand. The ideal average age varies by industry. For instance, seasonal overstock items like home goods can be held longer without major losses, while categories like consumer electronics lose value quickly as new models launch. As a general retail guideline, if inventory remains unsold after 120 days, it may be time to discount, bundle, or liquidate it through secondary channels.

Tracking inventory aging effectively depends on having accurate, real-time data. Businesses that rely on disconnected spreadsheets and siloed systems often struggle to maintain accurate reporting and timely insights. Implementing a centralized ERP system that integrates inventory, financials, orders, and supply chain data provides the visibility needed to improve decision-making and strengthen overall inventory management.

Conclusion

Tracking the right inventory accounting metrics is essential for any business that wants to stay profitable and efficient. These nine key metrics, ranging from turnover and carrying costs to sell-through rates and aging, help you understand how well your inventory is performing and where improvements can be made.

However, metrics alone aren’t enough. To get real value from this data, businesses need accurate, up-to-date information that can be easily analyzed and acted upon. That’s where a centralized ERP system makes all the difference. By bringing together inventory, financial, and supply chain data in one place (if you want to read about supply chain trends, then click here), you can make smarter decisions, reduce waste, and ensure your inventory works for you, not against you.

In the end, effective inventory management isn’t just about counting products, it’s about turning data into insight and insight into profit.

8 Critical Inventory Accounting Metrics You Should Be Tracking