Inventory Turnover
Inventory turnover is a ratio that shows how many times a business sells and replaces its stock over a set period, usually a year. It’s calculated by dividing the cost of goods sold (COGS) by average inventory value. A higher number means products move quickly off the shelves; a lower number means stock sits longer before it sells.
Formula and Example
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Average inventory is the beginning and ending inventory for the period, divided by two:
Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2
Example: A retailer reports $600,000 in COGS for the year, with average inventory of $100,000. Its inventory turnover is 6. That means it sold and replaced its stock six times over the year, or roughly once every two months.
What a High or Low Ratio Means
A high inventory turnover usually signals strong sales and efficient purchasing. But an unusually high ratio can also mean a company isn’t holding enough stock, which risks running out of popular items when demand rises.
A low ratio often points to excess or slow-moving inventory. That ties up cash, adds storage costs, and raises the risk of stock becoming obsolete before it sells. A low ratio isn’t automatically a problem, though – it can reflect a deliberate strategy for bulky, seasonal, or high-margin items that naturally sell more slowly.
What Counts as a “Good” Turnover Ratio
There’s no single benchmark that fits every business. Turnover depends on the industry, the product’s shelf life, and the length of the sales cycle.
Grocery and fresh food retailers often turn inventory many times a year because products spoil quickly. Furniture, industrial equipment, or luxury goods sellers may turn inventory just a few times a year and still run a healthy business. The most useful comparison is against your own historical trend or direct competitors, not a generic industry-wide number.
Inventory Turnover vs. Days Inventory Outstanding
Days Inventory Outstanding (DIO) expresses the same idea in days rather than times per period:
DIO = 365 ÷ Inventory Turnover
A turnover ratio of 6 equals roughly 61 days of inventory on hand. Finance teams often use DIO alongside turnover because it’s easier to compare against supplier payment terms and the overall cash conversion cycle.
How to Improve Inventory Turnover
- Forecast demand more accurately to avoid overordering.
- Set reorder points and safety stock levels based on actual sell-through, not guesswork.
- Discount or bundle slow-moving stock before it becomes obsolete.
- Work with suppliers on shorter lead times so you can restock in smaller, more frequent batches.
- Discontinue SKUs that consistently underperform and tie up capital.
