Inventory turnover

Inventory turnover formula

Inventory turnover = cost of goods sold ÷ average inventory value, where average inventory = (opening inventory + closing inventory) ÷ 2.

For example, a distributor's cost of goods sold for the year is $600,000. Inventory was worth $140,000 at the start of the year and $100,000 at the end, so average inventory is $120,000. Turnover = 600,000 ÷ 120,000 = 5. The business sold through its average stock five times.

Days of inventory (also called days inventory outstanding) turns that into time: 365 ÷ turnover. Here, 365 ÷ 5 = 73 days, so a unit sits in stock for about ten weeks on average. The inventory turnover calculator computes both.

Turnover in units vs value

The value version above is what finance uses, because it covers the whole business in one number. For operational decisions, calculate it per SKU in units: units sold in the period ÷ average units on hand. A SKU that sold 2,400 units while holding an average of 200 turned 12 times; one that sold 150 while holding 300 turned half a time. The second is a candidate for smaller orders, a promotion or discontinuing.

What a good turnover ratio looks like

There is no universal target. Fresh food turns much faster than spare parts, and a distributor carrying long-tail parts for service contracts will turn slower than a fashion brand by design. The useful comparisons are with your own history, between categories in your catalog, and between SKUs within a category. A falling ratio for the same category usually means purchasing has drifted ahead of demand.

How to improve inventory turnover

Turnover rises when you hold less stock for the same sales, or sell more from the same stock.

• Set safety stock per SKU from real variability instead of a blanket rule.
• Order closer to need, using a current reorder point rather than habit.
• Clear slow and dead stock before it ages further.
• Negotiate smaller, more frequent deliveries for fast movers.
• Track turnover alongside the other warehouse KPIs so a gain in one isn't paid for with stockouts.

Common inventory turnover mistakes

Several shortcuts give a misleading number.

• Dividing revenue instead of cost of goods sold, which inflates the ratio by your margin.
• Using closing inventory only, which swings with the timing of one large delivery.
• Blending all categories, so fast movers hide a pile of dead stock.
• Chasing turnover so hard that fill rate and customer service drop.