Inventory Turnover Calculator

Turnover tells you how many times a year you sell and replace your stock. It is a cash flow measure disguised as an operations one: every extra day of inventory is a day your money sits on a shelf instead of in the bank.

A worked year

A business with 840,000 of cost of goods sold, opening inventory of 210,000 and closing inventory of 190,000:

• Average inventory: 200,000
• Turnover ratio: 4.20x
• Average days in stock: 87

Average inventory = (opening + closing) ÷ 2
Turnover          = COGS ÷ average inventory
Days in stock     = 365 ÷ turnover

Eighty-seven days is how long the average item waits between arriving and being sold. If your supplier terms are 30 days, you are financing that gap for roughly two months out of your own working capital.

Cost, not retail — this ruins more calculations than anything else

Both the numerator and the denominator must be at cost. Cost of goods sold already is. Inventory frequently is not: many stock systems display holdings at retail value by default.

Value 200,000 of cost-basis stock at a retail price and it might show as 400,000, halving the reported turnover to 2.10x and doubling days in stock to 174. Every conclusion you draw from that is wrong. Check what basis your inventory report uses before entering anything.

A two-point average is a crude average

The denominator here is the mean of just two numbers: the value at the start and the value at the end. For a business with steady stock levels that is fine. For a seasonal one it can be badly misleading.

A retailer whose financial year ends in January measures closing stock at the emptiest point of the cycle, immediately after the holiday sell-through. The average of two low points understates the inventory actually carried for most of the year and flatters the turnover ratio. If your stock swings, compute a twelve-month average from monthly balances and enter that as both the opening and closing figure — the tool will average two identical numbers and give you the right denominator.

The 365-day year is also a simplification. It ignores that you are not selling on every one of those days.

Reading the number

There is no universal good ratio, and any source offering one is not being straight with you. A grocer moving perishable stock turns over well into double digits a year. A jeweller or a heavy machinery dealer may turn over once or twice, and that is normal for the category. Fashion sits somewhere in between and varies by season.

Two comparisons are worth making. The first is against your own prior periods, which controls for everything about your business that does not change. The second is against direct competitors on the same accounting basis, which is harder to obtain and easier to get wrong.

A rising ratio usually means tighter buying or stronger demand — but it can also mean you are running out of stock and losing sales you never recorded. A falling ratio can mean obsolete stock accumulating. The number tells you where to look, not what you will find.

Try these next

To check the margin on the stock you are turning over, use the profit margin calculator. To see what a clearance markdown on slow-moving stock costs you, use the discount calculator. To track how the underlying sales are trending year over year, use the revenue growth calculator.