Inventory Turnover
Also known as: Stock Turnover, Inventory Turns, Turn Rate
Definition
Inventory turnover is a ratio that shows how efficiently a company manages its inventory by measuring how many times stock is sold and replaced over a specific period, typically a year.
How to Calculate
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Example:
- Annual COGS: $500,000
- Average inventory value: $100,000
- Turnover = $500,000 ÷ $100,000 = 5 turns per year
You can also calculate days of inventory: Days of Inventory = 365 ÷ Inventory Turnover
In the example above: 365 ÷ 5 = 73 days of inventory on hand
What Good Turnover Looks Like
| Industry | Typical Turnover |
|---|---|
| Grocery | 12-20 turns |
| Apparel | 4-6 turns |
| Electronics | 6-8 turns |
| Furniture | 4-6 turns |
| Auto parts | 6-8 turns |
High vs. Low Turnover
High Turnover (Good)
- Less capital tied up in inventory
- Fresher products
- Lower storage costs
- But: Risk of stockouts if too high
Low Turnover (Problematic)
- Cash tied up in slow-moving stock
- Risk of obsolescence
- Higher storage costs
- May indicate overstocking or weak sales
Improving Inventory Turnover
- Better demand forecasting - Stock what will actually sell
- Reduce lead times - Order more frequently in smaller quantities
- Eliminate dead stock - Discount or liquidate slow movers
- Optimize reorder points - Balance stockouts vs. overstock
- Improve product mix - Focus on faster-moving items
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