Inventory Turnover Calculator

Why turnover matters

Stock is cash in a different form. Every extra week an item sits on the shelf is another week that money cannot pay bills or buy something that sells faster. It also takes up space, can go out of date and may eventually need a markdown. Measuring turnover puts a number on how hard your inventory is working.

Faster is not always better, though. Very high turnover can mean you are running out of stock and losing sales. The target is enough stock to meet demand, with as little excess as you can manage.

The formulas

Average inventory

Average inventory = (Starting inventory + Ending inventory) ÷ 2

Turnover

Turnover = Cost of goods sold ÷ Average inventory

Days on hand

Days on hand = Days in period ÷ Turnover

Use cost figures for all of these. Using sales instead of cost of goods sold would make turnover look higher than it really is.

Worked example

A retailer had $240,000 of cost of goods sold over a year, started with $35,000 of inventory and ended with $25,000.

1. Average inventory: ($35,000 + $25,000) ÷ 2 = $30,000.00.
2. Turnover: $240,000 ÷ $30,000 = 8×.
3. Days on hand: 365 ÷ 8 = 45.6 days.

Ways to improve it

• Look at the item level. A good overall figure can hide slow items. Rank products by how long they take to sell.
• Reorder smaller amounts, more often, if your suppliers allow it and shipping costs do not cancel out the gain.
• Clear out old stock on purpose. The discount impact calculator can help you price a clearance sale.
• Tighten your forecasting. Use past sales and the seasons to guide orders, not just gut feel.