What inventory turnover means
Inventory turnover is how many times you sell through your average stock in a period. A turnover of 5 in a year means you sold and replaced your average inventory five times, or roughly once every 73 days.
For a product brand it is a quick check on cash. Stock on the shelf is money you have already spent. A low turnover means that money is tied up for longer, and slow lines may end up discounted. A very high turnover can mean you are running too lean and missing sales when items go out of stock.
How the calculator works
- Cost of goods sold is the cost of the stock you sold in the period. Use cost, not sales revenue, because inventory is valued at cost. If you don't have it yet, work it out with the COGS calculator.
- Opening and closing inventory are your stock values at cost at the start and end of the same period.
- Days in the period is 365 for a year, about 90 for a quarter or about 30 for a month. Some accountants use 360 for a year. Pick one and stick with it.
- Add a target turnover to see the average stock level that would reach it, and how far you are from it.
The inventory turnover formula
| Figure | Formula |
|---|---|
| Average inventory | (Opening inventory + closing inventory) ÷ 2 |
| Inventory turnover | COGS ÷ average inventory |
| Days of inventory | Days in the period ÷ turnover |
| Turnover per year | Turnover × 365 ÷ days in the period |
| Average inventory for a target | COGS ÷ target turnover |
Worked example
A candle brand had a cost of goods sold of $60,000 last year. Its stock was worth $14,000 at cost at the start of the year and $10,000 at the end.
- Average inventory: ($14,000 + $10,000) ÷ 2 = $12,000
- Turnover: $60,000 ÷ $12,000 = 5 times a year
- Days of inventory: 365 ÷ 5 = 73 days
The owner wants to reach 6 turns a year on the same sales. That needs an average inventory of $60,000 ÷ 6 = $10,000, which is $2,000 less stock than now, and stock would sit for about 60.8 days.
For a single quarter, use that quarter's figures. If COGS for the quarter was $18,000 with the same opening and closing stock, turnover is 1.5 for 90 days, or about 60 days of inventory. At that pace the yearly turnover would be about 6.08.
Common mistakes
- Using sales instead of COGS. Sales include your margin, so dividing them by stock at cost makes turnover look higher than it is.
- Mixing periods. COGS for a quarter divided by a yearly average gives a meaningless number. Use the same period for both.
- Ignoring the season. If your year ends after the holiday rush, closing stock is low and the average looks small. For seasonal stock, average the month-end values across the year instead of just two points.
- Reading one number for the whole range. A strong overall turnover can hide slow lines. Check turnover for your bestsellers and your slow movers separately.
- Cutting stock too hard. A higher turnover is not always better if it means empty shelves and lost orders.
What is a good turnover?
There is no single good number. It varies a lot by industry and by product, so compare your turnover with your own past periods and with similar businesses rather than a general figure. Track it each quarter, and look at which products pull it down.
To see how each product is selling at a stockist, use the sell-through rate calculator. To check how many sales you need to cover your costs, try the break-even calculator. When you have slow stock to clear, put it in front of buyers with a product catalog they can order from.