Guide
How to Work Out Inventory Turnover (and What It Tells You About Your Stock)
Learn to calculate how many times a year your stock sells through, how many days it sits on the shelf, and how much cash is tied up in slow products.
What inventory turnover means
Inventory turnover is the number of times you sell and replace your whole stock in a year. A high number means stock comes in and sells quickly. A low number means money is sitting on shelves or in boxes. It is one of the quickest ways to see whether you are buying too much.
The sum
You need two numbers from the same period, usually a year.
- Cost of goods sold (COGS): what the items you sold cost you to buy or make. Use cost, not selling price.
- Average inventory: add your stock value at the start of the period to your stock value at the end, then divide by 2. Stock value is also at cost.
Turnover = COGS ÷ average inventory.
Days on shelf = 365 ÷ turnover.
A worked example
A candle and soap shop sold goods that cost $60,000 to make over the year. Stock at cost came to $18,000 on 1 January and $12,000 on 31 December.
- Average inventory: ($18,000 + $12,000) ÷ 2 = $15,000
- Turnover: $60,000 ÷ $15,000 = 4.0 times a year
- Days on shelf: 365 ÷ 4.0 = about 91 days
On average, a product sits for about three months before it sells.
What a good number looks like
There is no single right answer. A shop selling candles that last for years can hold stock longer than one selling fresh-made soap. Compare your number with your own past figures and across your own products, not with a number you read somewhere. What matters is the direction: a rising turnover with no stock-outs usually means you are buying better.
Work it out per product
The shop-wide number hides problems. Try it on two products:
- Product A: COGS $12,000, average stock $2,000. Turnover is 12,000 ÷ 2,000 = 6 times. Days on shelf: 365 ÷ 6 = about 61.
- Product B: COGS $3,000, average stock $3,000. Turnover is 3,000 ÷ 3,000 = 1 time. Days on shelf: 365 ÷ 1 = 365.
Product B holds 50% more money in stock than Product A ($3,000 against $2,000) and sells a quarter as much. That is where to cut the next order, run a sale, or stop restocking.
Turn the number into cash
Suppose the shop above keeps the same $60,000 of sales at cost but brings average stock down to $10,000.
- New turnover: $60,000 ÷ $10,000 = 6 times a year
- New days on shelf: 365 ÷ 6 = about 61
- Cash no longer tied up: $15,000 − $10,000 = $5,000
Do not cut so far that you run out of your best sellers. Pair this with a reorder point so you buy again just before you need to, not long before.
Keep it up to date
You only need three records: what you paid for stock, what you sold, and what is on hand at the start and end of each period. A workbook that tracks products, stock and orders in one place will give you these without a separate count each time.
