What is inventory turnover?
Inventory turnover is how many times you sell through your average stock in a period. A higher number means products move faster and less cash is tied up on shelves.
Inventory turnover = Cost of goods sold ÷ Average inventory
Days inventory outstanding = Days in period ÷ Inventory turnover
Inventory at target = Annual cost of goods sold ÷ Target turns per year
Example
A shop's cost of goods sold for the year is $240,000. Inventory was $50,000 at the start and $30,000 at the end, so average inventory is $40,000 and turnover is 6 times a year, about 61 days of stock on hand.
If the shop reached 8 turns a year, it would need only $30,000 of average inventory. That frees roughly $10,000 of cash.
How to improve inventory turnover
- Cut slow movers. Mark down or bundle items that haven't sold in 90 days. Check the margin first with the markup and margin calculator.
- Order smaller, more often. Smaller reorders keep less cash in stock.
- Price to move. See how a discount changes the units you must sell with the discount and price increase calculator.
- Don't go too lean. Running out of best sellers costs sales. Aim for a steady turnover, not the highest possible number.
Cash in inventory and cash in unpaid invoices both slow you down. Pair this with the DSO calculator and the cash runway calculator.
Frequently asked questions
What is a good inventory turnover ratio?
It varies by industry. Grocery and fresh food turn very fast, while furniture, jewelry and auto parts turn slowly. Compare against your own past periods and businesses like yours.
Should I use cost of goods sold or sales?
Cost of goods sold, because inventory is recorded at cost. Using sales overstates turnover by the size of your markup.
Why use average inventory instead of ending inventory?
Inventory often swings during the year, especially around busy seasons. Averaging the start and end of the period smooths that out. If you have monthly counts, averaging all of them is even better.