Inventory turnover: the ratio, the formula and what it tells a small store
Inventory turnover ratio = cost of goods sold divided by average inventory, over whatever period you are measuring. It tells you how many times you sold and replaced your stock in that period, which is a health check on the money sitting on your shelves.
The formula
Inventory turnover is the number of times a business sells through and replaces its average stock holding across a period. The standard formula is:
Inventory turnover = cost of goods sold ÷ average inventory
Both figures must be at cost, over the same period, and average inventory is usually taken as opening inventory plus closing inventory, divided by two. Twelve months is the normal window, so a turnover of 6 means you shifted the equivalent of your whole average stock holding six times in the year.
There is a unit version that is often more useful to a merchant than the money version:
Unit turnover = units sold in the period ÷ average units on hand
The unit version works on one SKU. The money version works on the whole store. Divide 365 by your annual turnover and you get the average number of days a unit sat before it sold, which is where turnover meets the day counting you already do on the shop floor.
Worked through on a small store
| Figure | Value | Where it comes from |
|---|---|---|
| Cost of goods sold, 12 months | $180,000 | What the stock you sold cost you, not what you charged for it |
| Opening inventory at cost | $26,000 | Stock value on the first day of the period |
| Closing inventory at cost | $34,000 | Stock value on the last day of the period |
| Average inventory | $30,000 | (26,000 + 34,000) ÷ 2 |
| Inventory turnover | 6.0 | 180,000 ÷ 30,000 |
| Average days held | 61 | 365 ÷ 6.0 |
The same store, one SKU
Take one candle variant from that store. It sold 1,200 units over the year and the stock count averaged 150 units on hand. Unit turnover is 1,200 ÷ 150 = 8, so roughly 46 days of cover on average. The store average was 6 turns and 61 days, so this candle moves faster than the shelf behind it.
That gap is the whole point of running turnover per SKU rather than only for the store. A single blended number hides the two problems that actually cost you money: the slow SKU that has your cash locked up for half a year, and the fast SKU that runs out between orders because your reorder point was set off a store-wide assumption.
What turnover does not tell you
Turnover is a backward look at a period that has closed. It is a good question to ask your accounts once a quarter, and a poor question to ask on a Tuesday morning when you need to know whether to place an order.
Three limits worth holding in mind:
- It averages away the spikes. A SKU that sold nothing for ten months and then cleared out in two still shows a respectable turn.
- It says nothing about supplier wait. A turnover of 8 is comfortable if your supplier ships in a week and dangerous if they ship in sixty days.
- High is not automatically good. Turnover rises when stock runs thin, so the fastest turning store in a category can also be the one that keeps running out.
For the day to day decision, merchants tend to reach for days of inventory remaining and a reorder point per SKU instead. Turnover tells you how hard your stock budget is working. The reorder point tells you what to do this morning.
Related terms
- Days of inventory on hand. The same idea expressed in days rather than turns, and the number most merchants read first.
- Sales velocity. Units per day over a chosen window, the input that turns a stock count into a forecast.
- Reorder point. The stock level at which you place the order, worked from velocity and lead time.
- Lead time. How long your supplier actually takes, the one figure no app can read from your store.
- Safety stock. The buffer you hold against demand and supply both going wrong at once.
- Stockout. What happens when the reorder window closes before you noticed it was open.
Each of those has its own page in this glossary, with the arithmetic worked through.
Questions
What is a good inventory turnover ratio?
There is no single figure that applies across categories, and anyone quoting one without naming the category and the margin structure is guessing. A perishable or trend-led range is expected to turn faster than slow-moving hardware. The useful comparison is your own store against itself over successive periods, and one SKU against the rest of your catalogue.
Should I use cost of goods sold or total sales in the formula?
Use cost of goods sold. Average inventory is held at cost, so putting retail sales over it inflates the ratio by your whole margin. If you only have revenue to hand, you can run a sales-to-stock ratio instead, but do not call the result turnover or compare it with a cost-based figure.
How do I calculate average inventory if I do not take regular counts?
Opening plus closing, divided by two, is the usual shortcut and it is fine for a yearly figure. If your stock swings hard with a season, average your month-end balances instead, because a two-point average taken either side of a peak can land well off the real level.
Can I calculate turnover monthly instead of yearly?
Yes. Use the month's cost of goods sold over that month's average inventory, and multiply by twelve if you want an annualised figure to compare against. Short periods are noisier, so a single weak month usually tells you less than a three-month trend.
Is inventory turnover the same as sell-through rate?
No. Sell-through compares units sold against the units you received in a period, usually on a single buy or a single SKU. Turnover compares what you sold against what you held on average. They answer different questions: sell-through grades a buying decision, turnover grades how hard the whole stock holding is working.
Does turnover tell me when to reorder?
Not directly. Turnover looks backwards at a closed period, and a reorder decision needs current stock, recent sales velocity and your supplier's lead time. Our guide on when to reorder works that calculation through from those three inputs.