Inventory Turnover Calculator

About the Inventory Turnover Calculator

Stock on the shelf is money that is not in the bank. Every item bought and not yet sold has tied up cash, taken up space, and risks going out of date, out of fashion or simply missing. At the same time, too little stock means lost sales and disappointed customers. Inventory turnover measures how well a business balances the two: how many times it sells and replaces its stock in a period.

This inventory turnover calculator takes the cost of goods sold and the beginning and ending inventory for a period, and gives the turnover ratio, the days of stock on hand, the average inventory, and the average value of stock sold each month. It works for a year, a quarter, a month or any period you choose.

How to Use the Inventory Turnover Calculator

Enter the cost of goods sold for the period. If you do not know it, the COGS calculator works it out from stock figures and purchases.

Enter the beginning inventory and ending inventory for the same period, at cost.

Enter the number of days in the period: 365 for a year, 90 for a quarter or 30 for a month.

How Inventory Turnover Is Calculated

  average inventory  =  (beginning inventory + ending inventory) ÷ 2
  turnover           =  cost of goods sold ÷ average inventory
  days on hand       =  days in period ÷ turnover

Step-by-Step Example

Cost of goods sold of 130,000 for a year, with inventory of 40,000 at the start and 35,000 at the end.

  Average inventory:  (40,000 + 35,000) ÷ 2   =  37,500
  Turnover:           130,000 ÷ 37,500        =  3.47 times
  Days on hand:       365 ÷ 3.47              =  105.3 days

On average, the business holds about three and a half months of stock and sells through its inventory roughly three and a half times a year.

Why Cost of Goods Sold, Not Sales

Inventory is recorded at what it cost the business. Sales are recorded at selling price, which includes the markup. Dividing sales by inventory mixes the two and makes turnover look higher than it really is — by the amount of the markup. Using cost of goods sold keeps both parts of the ratio on the same basis. Some published figures do use sales, so check which method a benchmark uses before comparing.

What Is a Good Turnover?

There is no single right figure. A grocer selling fresh food may turn stock over twenty or more times a year, because it has to. A furniture or jewellery shop may turn stock two or three times, because each item sells slowly but at a high margin. Car dealers, pharmacies, clothing retailers and manufacturers all have their own typical ranges.

The most useful comparisons are with businesses in the same trade and with your own figures over time. A falling turnover rate means stock is building up faster than it sells, which usually deserves attention.

Improving Inventory Turnover

Use sales data. Order to real demand rather than habit, and review which lines sell and which sit.

Clear slow stock. Discounting or bundling slow lines frees cash and space, even at a lower margin.

Order smaller amounts more often, if supplier terms and delivery costs allow.

Cut lead times. The faster stock arrives, the less safety stock you need.

Watch the trade-off. Very high turnover can mean frequent stock-outs and lost sales. The aim is the right amount of stock, not the least.

Turnover and Cash Flow

Faster turnover releases cash. If the business in the example could run with 30 days less stock on average, it would free roughly a month's worth of cost of goods — about 10,700 — to use elsewhere. That is why inventory is one of the first places to look when cash is tight.

Turnover for Individual Products

A single turnover figure for the whole business can hide very different results underneath. A few fast-selling lines may carry a range of slow ones that tie up most of the money. Working out turnover for each main product or category — using its own cost of goods sold and stock levels — shows where cash is really stuck and which lines deserve more shelf space. Stock that has not sold for many months is often worth clearing even at a loss, because it is costing space and cash while it waits.

Counting Stock Accurately

Turnover is only as reliable as the stock figures behind it. Count stock at the same point in each period, value it consistently at cost, and write off damaged or obsolete items promptly. An overstated closing stock makes turnover look worse than it is and, through cost of goods sold, makes profit look better.

Understanding Your Result

Inventory turnover is the number of times stock was sold and replaced.

Days on hand is how long the average stock would last.

Average inventory is the mean of the opening and closing stock.

Stock sold per month is the average cost of goods sold in a month.

Worth knowing explains the balance between too much and too little stock.

When Should You Use This Calculator?

Reviewing stock levels at the end of a period.

Comparing product lines or locations.

Planning purchasing and reorder levels.

Freeing up cash tied up in inventory.

Benchmarking against similar businesses.

Common Mistakes

Using sales instead of cost of goods sold.

Using only the closing inventory instead of the average.

Mixing periods, such as a year's COGS with a month's inventory.

Comparing across different industries.

Cutting stock so far that popular items run out.