Give Me 3 Minutes and I'll Show You How to Calculate Average Inventory

If you do not calculate average inventory the way your bank expects, you can fail an asset-based line-of-credit audit in 90 days. A 60-person job shop in Ohio learned this last spring when it used ending inventory on the monthly Borrowing Base Certificate instead. The bank flagged the variance, the borrowing base shrank by 180,000 dollars, and the shop spent the next quarter explaining the discrepancy to a lender that no longer trusted the numbers. The fix was a 10-line spreadsheet.

What is average inventory and how do you calculate it?

Average inventory is the typical amount of stock a manufacturer holds across a defined time window, used to smooth out the spikes from a sudden drawdown or a large supply receipt that would distort an ending-only figure. The simplest way to calculate average inventory is (Beginning Inventory + Ending Inventory) / 2. For a more accurate multi-period view, sum each period's ending inventory and divide by the number of periods. Most manufacturers calculating turnover ratios, days inventory outstanding, or lender borrowing-base reports use the multi-period form because month-end noise distorts the two-point version.

Why generic inventory math fails manufacturers

The two-period formula taught in every accounting textbook works fine for a retail shop holding finished goods. It falls apart in a contract machine shop holding raw bar stock that arrives in 8,000-pound bundles, work-in-process tied up on six different cells, and finished goods that drain against blanket POs in a single Friday.

GAAP requires balance-sheet inventory to be broken out into raw materials, work-in-process, and finished goods as separate current-asset line items. Lumping them into one "inventory" line and averaging the total hides the signal that matters most: which category is bloating, which is starving the floor, and which is sitting too long. Average a single combined number and you cannot answer any of those questions.

The formula for average inventory, three ways

Two-period average inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Use this only when you need a quick sanity check or when reporting on a single short period (one month, one quarter). It is the version most lender covenants accept by default if you only provide month-start and month-end snapshots.

Multi-period average inventory

Average Inventory = Sum of each period's ending inventory / Number of periods

A 12-month multi-period average uses 12 month-end snapshots, divided by 12. APQC defines raw materials inventory turns this way: "COGS for the year divided by the average value of month-end raw material inventory for the most recently completed fiscal year." This is the form benchmarking bodies and most asset-based lenders prefer because it dampens single-month spikes from large receipts or shutdown drawdowns.

Weighted moving average for cost layers

Weighted Average Cost = (Beginning Inventory Cost + Purchases Cost) / (Beginning Units + Purchased Units)

This applies when valuing inventory itself, not when computing the average level. Manufacturers running similar-SKU production typically use a perpetual moving-average cost recalculated on every receipt, rather than a periodic end-of-month recalc. The weighted-average cost feeds back into the per-unit value used in the other two formulas above.

Worked example: a 60-person Ohio machine shop

Take the same Ohio shop. Twelve month-end raw materials inventory snapshots for 2025:

Sum: 5,590,000. Divide by 12: 465,833 dollars average raw materials inventory.

If you had used the two-period formula instead ((412,000 + 459,000) / 2 = 435,500), you would have understated the true average by 30,000 dollars. On a Borrowing Base Certificate at the SBA 7(a) Working Capital Pilot's 60-percent inventory advance rate, that 30,000-dollar gap costs the shop 18,000 dollars of available credit. The cumulative effect of the wrong formula across a year is a six-figure misstatement of borrowing capacity.

What you actually do with the number

Average inventory by itself is just a balance-sheet figure. The number earns its keep when you plug it into one of three ratios:

Inventory turnover ratio = COGS / Average inventory. The manufacturing version uses COGS, not net sales, because COGS strips out selling-price markup. APQC's 2024 benchmark shows top-quartile manufacturers turn raw materials 16.5 times per year, while bottom-quartile shops manage about 6.5 turns. That 10-turn spread means the bottom shops hold roughly 34 more days of raw stock than the leaders. For finished goods the gap is similar: top-quartile shops hit 15 turns versus 6 for bottom.

Days inventory outstanding (DIO) = (Average inventory / COGS) x 365. Manufacturing DIO climbed from 68 days in 2020 to 74 days by 2023 per HighRadius industry data. Industrial and mid-cycle manufacturers typically run a 60-to-120-day DIO band; longer-cycle shops (aerospace, heavy machinery) sit at the high end. If your DIO trend line is moving from 75 to 90 across four quarters, you are tying up working capital faster than you are turning revenue.

Inventory carrying cost = Average inventory x Carrying cost rate. APQC pegs typical carrying costs at 20 to 30 percent of inventory value annually once you add storage, insurance, obsolescence, and the opportunity cost of capital. A shop carrying 465,833 in average raw inventory at 25-percent carrying cost is bleeding 116,458 dollars per year just to hold the stock.

The lender connection most shops miss

The SBA 7(a) Working Capital Pilot Program, launched August 2024, sets a maximum advance rate of 60 percent on inventory and 85 percent on domestic A/R (90 percent if insured) for asset-based lines of credit up to 5 million dollars. As of February 2026, the program also permits work-in-process to be included in the borrowing base, a meaningful expansion for shops where WIP is a large share of total inventory.

Facilities above 1 million require a monthly Borrowing Base Certificate; below 1 million, quarterly. That certificate uses average inventory, not ending. Get the average inventory calculation wrong and you either under-borrow (leaving cash on the table) or overstate your collateral position, which the bank's quarterly field audit will catch. SBA WCP loans are the largest source of asset-based credit growth for small manufacturers right now, with the program accounting for over 25 percent of its portfolio in manufacturing as of early 2026, so the formula you use to compute the monthly average is no longer an internal-controls question. It is a line-item on the borrowing base your lender will reconcile.

J.P. Morgan's 2024 Working Capital Index found that 76 percent of S&P 1500 companies saw days inventory outstanding rise in the prior year, contributing to roughly 707 billion dollars of trapped liquidity across the index, up about 40 percent from pre-pandemic levels. Small manufacturers are not exempt from that trend; they often feel it more sharply because access to credit is more sensitive to the accuracy of their reported averages.

FAQs

How do you find average inventory if you only have quarterly data?

Use the multi-period formula with four data points instead of twelve: sum the four quarter-end inventory values and divide by four. The result is less granular than a monthly average but still smooths out the worst of the single-period noise. If your business is seasonal (most US machine shops slow in late December), four quarter-end snapshots will give a fairer picture than two annual endpoints alone. The way to find average inventory accurately is to use as many periods as you have clean, audited snapshots for.

What is a good formula for average inventory in a job shop?

For a job shop running mixed work, the cleanest approach is to calculate three separate averages: raw materials, work-in-process, and finished goods. Each follows the same multi-period formula but uses its own balance-sheet line. Treating WIP as part of one combined average inventory equation usually hides the bottleneck signal you most need to see. The formula for average inventory at the line-item level is identical; only the input numbers change.

Why does the average inventory calculation use COGS instead of sales?

The inventory turnover ratio uses COGS because COGS reflects what it actually cost you to produce the goods you sold, valued the same way as the inventory on your balance sheet. Using sales would mix in your selling-price markup and overstate true turns. Wikipedia and APQC both note this is the standard manufacturing form of the ratio.

The one-line takeaway

If you take only one thing from this page: replace the two-period average inventory formula with a 12-month multi-period average for every report that touches a banker, a benchmark, or an internal turnover KPI. The math takes 3 minutes per month and pays back in cleaner ratios, healthier borrowing capacity, and fewer awkward audit conversations.

To track average inventory automatically across raw, WIP, and finished goods in one system, see how WorkCell's inventory module handles real-time inventory tracking, or read why working capital gets trapped on the shop floor.