How it works
Inventory turnover measures how many times a business sells through and replaces its stock in a period, calculated by dividing the cost of goods sold by average inventory. With $420,000 of annual COGS and an average of $70,000 sitting on shelves, stock turns six times a year — equivalently, each item waits about sixty-one days between arriving and leaving. The metric is capital speaking: inventory is money bought in advance and stored in boxes, and turnover tells you how hard that money works. Fast turnover means lean capital, fresher stock and less markdown exposure, purchased at the risk of stockouts; slow turnover means cash parked where it neither earns nor breathes, aging toward clearance. Two technical points decide whether the number means anything. Use cost of goods sold, not revenue — dividing by revenue flatters the ratio by whatever markup you charge. And average the beginning and ending inventory values rather than grabbing a snapshot, since a single date can land anywhere between seasonal peaks. Context does the rest: grocers turn dozens of times annually, jewelers a handful. Benchmark within your category, watch the trend over several periods, and treat a sudden slowdown as an early-warning light for obsolescence and forced markdowns.
Formula
Turnover = COGS / ((beginning inventory + ending inventory) / 2) | Days of inventory = 365 / turnover
Tips
- Always divide by COGS, never revenue — revenue inflates the ratio by your markup.
- Average start and end inventory; a single-date snapshot lands wherever seasonality put it.
- Benchmark against your own category and your own history, not other industries.
- Falling turns usually precede visible markdowns — investigate before the clearance sale.
- Very high turnover can mean under-buying: check stockout rates before celebrating.
Frequently asked questions
- How do you calculate inventory turnover?
- Divide the cost of goods sold for the year by average inventory — the average of beginning and ending stock values, taken at cost. COGS of $420,000 against average inventory of $70,000 gives a turnover of 6, meaning stock cycles six times a year.
- What is a good inventory turnover ratio?
- Entirely industry-dependent: grocery and fresh food run double digits, apparel mid-single digits, furniture and jewelry lower still. Compare against businesses selling similar shelf lives. Within your category, a stable or rising ratio with few stockouts is the healthy pattern.
- What does low inventory turnover mean?
- Capital is sitting on shelves instead of working: cash tied up in stock that risks obsolescence, damage and markdowns. Chronic low turnover usually signals over-buying, stale assortments or declining demand — each with a different fix, so diagnose before restocking.
- Should I use COGS or revenue in the turnover formula?
- COGS. Both numerator and denominator belong at cost, since inventory is carried at cost on the balance sheet. Using revenue mixes retail-priced sales with cost-valued stock and inflates the ratio by your entire markup.
- How many days of inventory is ideal?
- Divide 365 by your turnover — six turns equals about 61 days. The ideal balances stockout risk against carrying cost: enough to never miss a sale, little enough that cash isn't sleeping in a warehouse. Your supplier lead time sets the practical floor.