Inventory Turnover Ratio: Formula and Example

Inventory turnover tells you how many times you sold and replaced your stock in a period, usually a year. It is the simplest way to see whether your money is working or sitting on a shelf.

The inventory turnover formula

Inventory turnover = Cost of goods sold ÷ Average inventory

Cost of goods sold (COGS) is what the products you sold cost you to buy or make during the period. It is not your sales revenue.
Average inventory is the value of your stock at cost, averaged over the period. The simplest version is (opening stock value + closing stock value) ÷ 2.

Both numbers must be at cost. Mixing sales at selling price with stock at cost price is the most common mistake, and it makes turnover look much better than it is.

Days of inventory

The same information is often easier to read as a number of days:

Days of inventory = 365 ÷ Inventory turnover

It answers the question “on average, how long does an item wait before it is sold?”.

A worked example

A small shop has these numbers for last year:

	Amount
Cost of goods sold for the year	$120,000
Stock value on January 1, at cost	$22,000
Stock value on December 31, at cost	$18,000

Average inventory = ($22,000 + $18,000) ÷ 2 = $20,000
Inventory turnover = $120,000 ÷ $20,000 = 6
Days of inventory = 365 ÷ 6 = about 61 days

The shop sold and replaced its stock six times in the year. On average, a product waited two months before it was sold, and about $20,000 of cash was tied up in stock at any time.

What is a good inventory turnover?

There is no single good number. It depends on what you sell:

Fast-moving goods such as food, drinks and consumables turn over many times a year, because they are bought often and can expire.
Slow-moving goods such as furniture, jewellery or specialist equipment turn over only a few times a year, and that is normal.

Two comparisons are more useful than any outside benchmark:

Against yourself. Is turnover going up or down compared with last year or last quarter?
Between your own products. Which products turn ten times a year, and which have not moved in six months?

Too low or too high

Low turnover means cash is stuck in stock. You pay for storage, and products risk going out of date or out of fashion.
Very high turnover is not always good news. It can mean you hold too little stock, run out often and pay for many small urgent orders.

The aim is not the highest number. It is the highest turnover you can reach without running out of your best sellers.

Calculate it for each product

Turnover for the whole business hides the detail. A spreadsheet shows you the products that need attention.

	A	B	C	D	E
1	SKU	Units sold in 12 months	Average units in stock	Turnover	Days of inventory
2	MUG-BLU-12	480	40	`=B2/C2`	`=365/D2`
3	MUG-RED-12	60	45	`=B3/C3`	`=365/D3`

For a single product you can use units instead of money, because the cost per unit is the same on both sides of the division.

In this example the blue mug turns 12 times a year (30 days of stock). The red mug turns 1.3 times a year (about 274 days of stock). The red mug is where the money is stuck.

For average units in stock, take the quantity at the end of each month and average the twelve numbers. If you only have two counts, average those. A regular stock count keeps these figures honest, and an inventory spreadsheet with a movements sheet gives you units sold without extra work.

How to improve inventory turnover

Find the slow products first. Sort your list by days of inventory. The bottom 20% of products usually hold a large share of the stock value.
Order less, more often. Smaller, more frequent orders reduce average stock. Check that shipping costs and supplier minimums do not cancel the gain.
Set a reorder point for each product instead of reordering by feel. See reorder point and safety stock.
Clear dead stock. Bundle it with a best seller, discount it, or sell it in bulk. Cash back at a small loss is often better than a shelf that never empties.
Stop reordering what does not sell. It sounds obvious, but many shops reorder a full range out of habit.
Shorten supplier lead times where you can. The faster stock arrives, the less of it you need to hold.
Review every quarter. Turnover changes with seasons. One calculation a year is too slow to act on.

When software helps

Above a few hundred products, calculating turnover by hand takes too long to do regularly. Most inventory tools include a report for it, usually under names like “inventory turnover”, “stock ageing” or “days on hand”. If you are deciding whether you have reached that point, read inventory spreadsheet or inventory software.

Common questions

Should I use sales or cost of goods sold?

Cost of goods sold. Your stock is valued at cost, so the top of the formula must be at cost too. Using sales revenue inflates the result by your margin.

How do I find cost of goods sold?

For a simple shop: opening stock value + purchases during the period − closing stock value. Accounting software shows it on the profit and loss report.

How often should I calculate inventory turnover?

Every quarter for the whole business, and at least twice a year for each product. Use the last twelve months each time so that seasons do not distort the number.

Is a higher inventory turnover always better?

No. If you run out of stock often, your turnover looks excellent while you lose sales. Read turnover together with how often your best sellers were out of stock.

Key takeaways

Inventory turnover = cost of goods sold ÷ average inventory, both at cost.
Days of inventory = 365 ÷ turnover.
Compare against your own past numbers and between your own products.
Low turnover ties up cash. Very high turnover can hide stockouts.
Calculate it per product to find the slow items, then order less of them or clear them.