I’m new to the residential construction industry. Can you help me understand inventory turnover ratio?

You bet! First, let’s start with the formula:

Inventory Turnover = Cost of Goods Sold/Value of Average OnHand Inventory

Because of the high dollar value of inventory in home construction, it’s critical for a home builder to monitor and maintain a healthy Inventory Turnover rate. Too much inventory = too much risk and too little inventory = missed sales opportunities. A lower than optimum number indicates low demand, while a high ratio is indicative of under-stocking.

Identifying appropriate inventory levels for each season can mean the difference between a builder who survives market fluctuation and one that doesn’t. The optimum rate will not only depend upon season, but also whether or not the builder is focused on single vs. multi-family and if they primarily sell spec homes or strictly build-to-suit. For a typical single-family builder with a mix of both spec and custom homes, a ratio of 6 to 8 is a good starting point. Tune from there based on your specific environment.

Need more help with your performance indicators? Don’t hesitate to reach out to the team at Cornerstone Solutions.