Inventory turnover = cost of goods sold ÷ average inventory. A shop with $120,000 of cost of goods sold a year and an average of $30,000 in stock has a turnover of 4: it sells through its inventory about every 91 days. What counts as «good» depends on the industry.
The formula, step by step
- Cost of goods sold (COGS): what the products you sold cost you during the year: $120,000.
- Average inventory: (inventory at the start + inventory at the end) ÷ 2 = ($25,000 + $35,000) ÷ 2 = $30,000.
- Turnover: $120,000 ÷ $30,000 = 4.
- Days of inventory: 365 ÷ 4 ≈ 91 days.
Use cost, not sales price, on both sides so the ratio compares like with like.
Turnover and days of inventory
| Turnover per year | Days to sell through stock |
|---|---|
| 2 | 183 |
| 4 | 91 |
| 6 | 61 |
| 8 | 46 |
| 12 | 30 |
What’s a good inventory turnover ratio?
There’s no single number. Businesses selling perishable or fast-moving products, like groceries, tend to turn inventory many times a year, while furniture or jewelry may turn only a few times. Compare yourself with your own past results and with businesses like yours.
- Too low: cash is tied up in stock, products may go out of date and storage costs add up.
- Too high: you may run out of stock and lose sales.
Why faster turnover frees up cash
If the same shop sold the same $120,000 while keeping an average of $24,000 in stock instead of $30,000, turnover would rise to 5 (73 days), and about $6,000 of cash would no longer be sitting on shelves. That’s money available for rent, payroll or a tight week.
How to improve it
- Order smaller amounts more often for slow-moving items.
- Find products that rarely sell and discount or bundle them.
- Track sales by product to reorder based on real demand.
- Check that your prices still give the margin you need; see margin vs. markup.
Look at turnover by product, too
A single number for the whole shop can hide slow products. The same business, split by product line:
| Product line | Cost of goods sold | Average inventory | Turnover | Days to sell |
|---|---|---|---|---|
| Candles | $60,000 | $8,000 | 7.5 | 49 |
| Gift sets | $40,000 | $10,000 | 4.0 | 91 |
| Home decor | $20,000 | $12,000 | 1.7 | 219 |
Home decor holds 40% of the stock but brings in only a sixth of the cost of goods sold. That’s where smaller orders or a clearance would free the most cash.
More questions
How is inventory turnover calculated?
Divide cost of goods sold for the period by average inventory at cost. Average inventory is the starting plus ending inventory divided by two.
What does inventory turnover ratio indicate?
How many times you sell and replace your stock in a period. Higher usually means stock moves faster and less cash is tied up.
How do I calculate days of inventory?
Divide 365 by the turnover ratio. A turnover of 4 is about 91 days.
Can I use sales instead of cost of goods sold?
It’s better to use cost of goods sold, because inventory is recorded at cost. Using sales makes turnover look higher than it really is.
The bottom line
Divide cost of goods sold by average inventory to see how fast your stock moves. Track it over time, compare it with similar businesses and use it to free cash tied up in slow products.
Sources
This article is for educational purposes only and is not business or financial advice. The example figures are illustrative.