Your warehouse is full. Sales are strong. So why is cash tight?
Inventory turnover reveals the answer. It tells you how quickly your money flows through inventory and back into cash you can use.
Inventory Turnover Definition
Inventory turnover measures how many times you sell and replace your inventory during a period. It indicates how efficiently your inventory investment generates sales.
High turnover means inventory moves quickly—you're selling products soon after buying them. Low turnover means inventory sits longer, tying up cash and warehouse space.
The Inventory Turnover Formula
Inventory Turnover = Cost of Goods Sold / Average Inventory
Both numbers should use the same time period (usually one year) and be measured in the same terms (cost, not retail price).
Breaking Down the Formula
Cost of Goods Sold (COGS): The direct cost of the products you sold during the period. Find this on your income statement.
Average Inventory: Your typical inventory level during the period. Calculate as: (Beginning Inventory + Ending Inventory) / 2. For more accuracy, average monthly inventory levels.
Example Calculation
Your annual numbers:
- Cost of Goods Sold: $2,400,000
- Beginning Inventory: $300,000
- Ending Inventory: $500,000
Average Inventory = ($300,000 + $500,000) / 2 = $400,000
Inventory Turnover = $2,400,000 / $400,000 = 6 turns per year
This means you sold and replaced your entire inventory 6 times during the year.
Days Inventory Outstanding (DIO)
A related metric converts turns into days:
Days Inventory Outstanding = 365 / Inventory Turnover
Using our example: 365 / 6 = 61 days
On average, inventory sits for 61 days before being sold. This is also called "days of inventory" or "inventory days."
What Does Inventory Turnover Tell You?
Cash Conversion Speed
Each inventory turn converts invested cash back into cash (through sales). More turns means faster cash conversion and less capital tied up in inventory.
Operational Efficiency
Higher turnover often indicates efficient operations—good forecasting, appropriate stock levels, and products that sell.
Product Health
Slow-turning products might be over-ordered, poorly marketed, or past their prime. Tracking turnover by SKU helps identify problem products.
Industry Positioning
Turnover varies widely by industry. Comparing your turnover to industry benchmarks shows whether you're operating efficiently relative to peers.
What's a Good Inventory Turnover?
It depends heavily on your industry:
- Grocery / Perishables: 12-20 turns
- Fashion / Apparel: 4-6 turns
- Consumer Electronics: 6-8 turns
- CPG / General Consumer: 4-8 turns
- Luxury Goods: 2-4 turns
Within these ranges, higher is generally better—but not always. Very high turnover might indicate you're understocked and missing sales opportunities.
Turnover Varies by Product
Don't just look at overall company turnover. Analyze by product or category:
Fast movers with high turnover deserve prominent placement and steady replenishment.
Slow movers with low turnover may need promotions, markdowns, or discontinuation.
The classic 80/20 rule often applies: 20% of SKUs drive 80% of sales (and turns much faster than the rest).
How to Improve Inventory Turnover
Improve Demand Forecasting
Better forecasts mean ordering closer to actual demand. You're not stuck with excess inventory from optimistic projections.
Reduce Safety Stock (Carefully)
Excess safety stock lowers turnover. Trim buffers where you have reliable supply and stable demand—but don't sacrifice fill rate.
Negotiate Smaller, More Frequent Orders
Instead of one large order per quarter, place smaller monthly orders. This keeps average inventory lower and turnover higher.
Address Slow Movers
Products that haven't sold in 90 days drag down your overall turnover. Discount them, bundle them, or discontinue them.
Optimize Assortment
Fewer SKUs that sell well outperform many SKUs that sell slowly. Rationalizing your product assortment often improves overall turnover.
Shorten Lead Times
Shorter lead times let you order closer to when you need products, reducing the inventory you carry at any given time.
The Turnover Trade-Off
Higher turnover isn't always better. There's tension between:
High Turnover Benefits:
- Less cash tied up in inventory
- Lower carrying costs
- Fresher products
High Turnover Risks:
- More frequent stockouts if demand spikes
- Higher ordering costs (more POs, more shipments)
- Less cushion for supply disruptions
The goal is the right turnover for your business—high enough to be capital-efficient, but not so high that you're constantly at risk of running out.
Key Takeaways
- Inventory turnover measures how many times you sell and replace inventory during a period
- Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory
- Higher turnover generally indicates efficient inventory management
- Target turnover varies by industry—CPG brands typically see 4-8 turns annually
- Analyze turnover by product to identify fast movers and slow movers
- Balance turnover against service levels—too high means stockout risk
Frequently Asked Questions
Q: What is inventory turnover?
Inventory turnover measures how many times you sell and replace your inventory during a period. It indicates how quickly your inventory investment converts back to cash through sales.
Q: How do you calculate inventory turnover?
Inventory Turnover = Cost of Goods Sold / Average Inventory. For example, if your annual COGS is $1,200,000 and average inventory is $200,000, your turnover is 6 turns per year.
Q: What's a good inventory turnover ratio?
It varies by industry. Grocery stores might turn 15+ times per year. CPG brands typically see 4-8 turns. Luxury goods might turn only 2-4 times. Compare to your industry peers.
Q: Is higher inventory turnover always better?
Generally yes, but not always. Very high turnover might mean you're understocked and missing sales. The goal is efficient turnover that maintains strong fill rates.
Q: What's the difference between inventory turnover and days inventory outstanding?
They measure the same thing differently. Turnover is how many times you replace inventory annually. Days inventory outstanding (365 / turnover) is how many days inventory sits before selling.