Inventory turnover is a ratio showing how many times a business sells and replaces its stock in a period, found by dividing COGS by average inventory.
Inventory turnover is a ratio that shows how many times a business sells and replaces its stock in a period, usually a year. A high number means stock spends little time on the shelf before it is sold; a low number means cash is sitting in the storeroom, ageing towards dead stock. Because it connects purchasing, sales, and cash flow in a single figure, it is one of the first numbers a lender, buyer, or new finance lead will ask about.
The inventory turnover formula
Inventory turnover = Cost of goods sold (COGS) ÷ Average inventory
where average inventory is normally (opening inventory + closing inventory) ÷ 2, both valued at cost. COGS is used rather than revenue because stock is carried at cost - using sales revenue on top inflates the ratio by the profit margin and makes comparisons meaningless. A useful companion metric is days sales of inventory (DSI) = 365 ÷ turnover, which converts the ratio into the average number of days an item sits before selling.
A worked example
A workshop supplies business has COGS of 200,000 for the year. Inventory was valued at 45,000 on 1 January and 35,000 on 31 December.
- Average inventory = (45,000 + 35,000) ÷ 2 = 40,000
- Inventory turnover = 200,000 ÷ 40,000 = 5
- DSI = 365 ÷ 5 = 73 days
The business sells through its full stock five times a year, and a typical item waits about ten weeks between arriving and leaving. Whether that is good depends on what it sells - fine for machinery parts, alarming for anything perishable.
What counts as a good ratio
There is no universal target. A grocer turns perishable stock far faster than a furniture showroom, and a jeweller slower still - all three can be perfectly healthy. The honest benchmarks are your own trend and close competitors in the same trade. Direction matters more than the level: a ratio drifting down means stock is accumulating faster than it sells, while a ratio spiking up can mean the opposite problem - shelves running too lean, with stockouts and rush orders hiding behind a flattering number.
Improving a slow turnover
- Clear the tail. Identify items that have not moved in months and discount, repurpose, or dispose of them - dead stock drags the average down while occupying space and cash.
- Order smaller, more often. Aligning order sizes with actual usage and supplier lead time keeps average inventory lower for the same availability. Taken to its logical end this becomes just-in-time inventory, with its own risks.
- Trust the data before acting on it. Turnover calculated from wrong stock figures is noise - inventory accuracy comes first, then optimisation.
- Use real sales data. For retailers the COGS side usually lives in the POS system; pulling the calculation from there rather than estimates keeps the ratio honest.
What the ratio does not tell you
Turnover is an average across everything you stock, so a healthy headline number can hide a few star items subsidising shelves of slow movers. It also says nothing about service level - a business can post a superb ratio while disappointing customers daily. Read it per category where possible, and alongside stockout incidents rather than instead of them.
Related terms
- Dead Stock - the unsellable tail that low turnover eventually becomes
- Lead Time - the supplier delay that sets how lean you can safely run
- Just-in-Time Inventory - the strategy of maximising turnover by minimising held stock
- Inventory Accuracy - the record quality every stock metric depends on
- Bill of Materials (BOM) - the parts list that drives component demand in manufacturing