Inventory turnover

What it means

Inventory turnover says how many times the stock "turns" in a period - how many times a volume equal to average stock is sold. It is cost of goods sold divided by average inventory.

The inverse is easier to read: the average number of days goods sit on the shelf. A figure of 6 means turning over every two months, roughly 60 days of money tied up.

The ratio only makes sense when numerator and denominator sit on the same price level. Inventory is carried at acquisition cost in the books, so it is divided into cost of goods sold, not into sales; plug in sales including the margin and the turnover comes out higher than reality.

How it works in practice

It is one of the most practical measures in managing working capital. Cutting ten days off the cycle frees cash as reliably as raising the margin does, only faster and without touching prices.

It is tracked by product group, not for the warehouse as a whole: an average hides items that have not turned once all year. Those surface at the stocktake, and an impairment allowance belongs with them.

With seasonal sales, such as garden equipment or winter clothing, an average of opening and closing balances distorts the whole picture. We therefore work out average inventory from the monthly balances in the stock records, so that the pre-season peak actually shows in the figure.

What to watch out for

Low turnover ties up cash and hurts liquidity; too high means stockouts and lost sales. The goal is not a maximum but a balance that matches your suppliers’ lead times.

Turnover can be dressed up: an allowance or a write-off of obsolete goods cuts average inventory and the ratio improves without a single sale. Where turnover is a management KPI, we check when comparing years whether sales changed or only the stock valuation did, or the bonus is paid for a number that freed up no cash at all.