What Is Inventory Turnover? The Formula, a Worked Example and How to Improve It

Walk into almost any shop's storeroom and you will find it: the carton of phone covers nobody asked for, the shoes in a size that never sells, the cooking oil bought "because the supplier had a deal". Each one is money you have already spent, sitting on a shelf, waiting.

Inventory turnover is the number that tells you how much of that is going on.

The short answer: inventory turnover is how many times you sell through and replace your stock in a period, usually a year. You work it out by dividing your cost of goods sold by your average inventory value. A higher number generally means your money moves faster. A number that is too high can mean you keep running out.

01The formula

Inventory turnover = Cost of goods sold ÷ Average inventory

And average inventory is simply:

Average inventory = (Opening stock value + Closing stock value) ÷ 2

Use cost values for both, not selling prices. More on why in a moment.

02A worked example

Here is a hypothetical general shop, using round numbers in your own currency:

1. Stock on hand at the start of the year, at cost: 50,000 2. Stock on hand at the end of the year, at cost: 30,000 3. Average inventory: (50,000 + 30,000) ÷ 2 = 40,000 4. Cost of goods sold for the year: 200,000 5. Inventory turnover: 200,000 ÷ 40,000 = 5

So this shop sold through its average stock five times in the year.

You can turn that into something easier to picture: days of stock.

Days of stock = 365 ÷ Inventory turnover

Here, 365 ÷ 5 = 73 days. On average, an item sits in this shop for about ten weeks before someone buys it. That is ten weeks of your cash on a shelf instead of in your account or paying a supplier.

Why cost, not sales?

If you divide by sales revenue instead, your markup creeps in. Two shops moving exactly the same goods would show different turnover just because one prices higher. Cost of goods sold keeps the comparison honest: it measures what actually left the building, at what it cost you.

Two quick cautions

• Opening and closing stock can mislead. If you stock up heavily before a festive season or the start of school term, a simple average of two dates can hide what your shelves looked like for most of the year. If you can, average your stock value month by month.
• Your stock figures are only as good as your count. If the system says you have 40,000 worth of stock and the shelf says 34,000, your turnover number is wrong before you start. A regular [stock take](/blog/how-to-do-a-stock-take/) fixes that.

03What is a "good" turnover?

There isn't one number that suits everyone, and be wary of anyone who gives you a universal target.

It depends heavily on what you sell:

• Fresh food, bread, dairy and drinks need to move fast or they spoil, so supermarkets and minimarts should expect high turnover.
• Pharmacies sit in the middle: fast-moving pain relief and baby items next to slow prescription lines.
• Fashion and footwear move with the seasons, so turnover dips and peaks through the year.
• Electronics, hardware and spare parts usually turn more slowly, but each item carries more value.

The most useful comparison is with yourself. Work out your turnover this quarter, then next quarter, then the same quarter next year. If it is falling, stock is piling up somewhere. Then go one level deeper and look at turnover by product or category, because a healthy overall figure can hide a whole shelf of dead stock propped up by a few bestsellers.

04When high turnover is a warning sign

It is tempting to think higher is always better. It isn't.

If your turnover climbs because customers keep finding empty shelves, you are not running a lean shop, you are losing sales. Someone who walks out without the sugar or the charger they came for may not come back. The goal is stock that moves quickly and is there when people want it. Our guide on [how to reduce stockouts](/blog/how-to-reduce-stockouts/) covers that side.

05Why it matters for your cash

Picture two shops with the same sales. One turns its stock four times a year, the other eight times. The second shop needs roughly half as much money sitting in stock to sell the same amount. That difference is cash it can use to pay suppliers on time, take on a new product line, cover a slow month, or avoid borrowing.

Slow stock also costs you in quieter ways:

• Storage space you are paying rent on
• Expiry and damage: medicines, cosmetics, food and drinks have dates; electronics go out of fashion
• Markdowns later to clear what didn't sell
• Opportunity: money in slow lines can't be spent on the lines that fly

06Six ways to improve your turnover

1. Find the slow movers and decide what to do with them

Pull a product movement report and sort by how long items have been sitting. For anything that hasn't moved in months, choose: mark it down, bundle it with a bestseller, return it to the supplier if they will take it, or stop reordering it. Don't just let it sit.

2. Order from sales, not from habit

Many owners reorder what they ordered last time, or whatever the sales rep is pushing this week. Look at what actually sold over the last few weeks and order to that, adjusted for anything you know is coming, like a holiday or the school term.

3. Buy smaller, more often

A bulk discount looks good on the invoice. But if half the cartons sit for three months, the discount may not cover what that stock is costing you. Where a supplier allows it, smaller and more frequent orders keep less cash tied up.

4. Work on supplier lead times

The longer a supplier takes to deliver, the more stock you have to hold to cover the gap. A second supplier for key lines, or a supplier closer to you, lets you carry less without running out.

5. Rotate perishables properly

For food, drinks, cosmetics and medicines, sell the earliest expiry dates first. That is [FEFO (first expired, first out)](/blog/what-is-fefo/). Expired stock is the worst kind of slow stock, because it turns straight into a loss.

6. Clear ageing stock before it becomes a write-off

A short, targeted promotion on stock that is starting to age is usually cheaper than holding it for another season and then throwing it away.

07Where your POS comes in

You can work all of this out on paper at the end of the year. The trouble is that by then the money has been sitting on the shelf for twelve months.

A POS that records every sale, delivery, return and damage as it happens gives you stock figures you can trust and lets you check them whenever you like. With EliteTeQ, you get:

• Product movement reports showing what sells, what crawls and what hasn't moved at all, by product, category and branch
• Low-stock alerts so leaner stock levels don't turn into empty shelves
• Expiry tracking with alerts before perishable stock is lost
• All your branches in one view, so you can move surplus stock from one shop to another instead of buying more
• Returns and damages recorded against the stock, so your numbers match the shelf

08Common questions

Is inventory turnover the same as stock turnover?

Yes. For a shop, the two terms mean the same thing: how many times you sell and replace your stock in a period.

How often should I check it?

Monthly is a sensible rhythm for most shops. For fast-moving or perishable lines, look at product movement weekly so you catch slow stock before it expires.

Does it apply to service businesses?

Only to the products they carry. A salon selling hair products, a garage holding spare parts or a gym with a small drinks fridge should track turnover on that stock, separately from service income.

How does margin fit in?

Higher-margin goods can afford to move more slowly, because each sale earns more. Low-margin goods like groceries need volume. Look at margin and turnover together before you decide a product isn't earning its shelf space.

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