What is inventory turnover?
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How many times you sell through your average stock in a period.
Inventory turnover is how many times you sell through your average stock in a period, usually a year. It tells you how hard your inventory is working.
Formula
Inventory turnover = cost of goods sold ÷ average inventory
Average inventory = (starting inventory + ending inventory) ÷ 2
Divide the days in the period by the result to get days of inventory, the average time a unit waits before it sells.
Example
A brand has $240,000 of cost of goods sold in a year. Inventory was worth $50,000 at the start and $70,000 at the end, so average inventory is $60,000.
- Turnover: 240,000 ÷ 60,000 = 4
- Days of inventory: 365 ÷ 4 = about 91 days
Try your own numbers in the inventory turnover calculator.
How to read it
A rising ratio means stock is moving faster or you are holding less of it. A falling ratio means the opposite. Neither is automatically good. A low ratio ties up cash and storage in slow stock. A very high ratio can mean you run close to the edge and risk a stockout.
The right level depends on your category, so compare your ratio with your own past periods and work it out per product, not only for the whole business.
How to improve it
- Order quantities that match sales rate and lead time, not round numbers.
- Check whether a supplier’s MOQ is pushing you to buy more than you sell.
- Set the buffer deliberately with safety stock instead of padding every order.
- Stop reordering SKUs that no longer sell.
Related terms
- Reorder point: the stock level that triggers an order.
- Stockout: what a turnover pushed too high can lead to.
Frequently asked questions
What is inventory turnover?
Inventory turnover is a ratio of the cost of goods sold to average inventory over a period. It shows how many times you sold and replaced your stock in that time.
What is the inventory turnover ratio formula?
Inventory turnover = cost of goods sold ÷ average inventory, where average inventory = (starting inventory + ending inventory) ÷ 2. Use the same period, such as a year, for both.
What is a good inventory turnover ratio?
It depends on the category. Goods that sell fast or spoil turn over more often than bulky, high-value or seasonal goods. Judge your ratio against your own history and similar products, and by SKU rather than as one average.
What does a low inventory turnover mean?
Stock is selling slowly compared with how much you hold. Common causes are over-ordering, minimum order quantities that exceed demand, and products that have stopped selling. The cost is cash tied up in stock.