Every unit sitting on a shelf is money you have already spent and cannot yet use. Inventory turnover measures how many times a year you sell and replace that stock, and it is one of the few ratios that connects directly to whether you have cash in the bank.
The formula
Divide cost of goods sold for the period by average inventory value over the same period. Average inventory is normally the opening and closing values halved.
- Average inventory = (beginning + ending) ÷ 2
- Inventory turnover = cost of goods sold ÷ average inventory
- Days sales of inventory = days in period ÷ turnover
With $480,000 of cost of goods sold and inventory moving from $70,000 to $90,000, average inventory is $80,000 and turnover is 6.0. Days sales of inventory is 365 ÷ 6 = 61 days, meaning stock sits for about two months before selling.
Use cost of goods sold rather than revenue. Inventory is carried at cost, so dividing revenue by inventory mixes a retail-priced numerator with a cost-priced denominator and inflates the ratio by your entire margin.
Try it freeInventory Turnover CalculatorMeasure how fast stock converts into sales.What counts as healthy
Benchmarks vary enormously, which is why comparing your ratio to a general average is close to meaningless. What matters is your own trend and your own sector.
- Grocery and fresh food: 12 to 25 times a year. Stock spoils, so it has to move.
- Restaurants: often higher still, with produce turning weekly.
- General retail and consumer goods: roughly 4 to 8.
- Apparel: 3 to 6, with heavy seasonal swings that make a single annual figure misleading.
- Automotive and heavy equipment dealers: 2 to 4, on high-value slow-moving units.
- Jewellery and luxury goods: 1 to 3, where the margin justifies the carrying cost.
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Too high is a real problem
The instinct is to treat a rising ratio as unambiguous progress. It is not. Turnover well above your sector norm usually means you are running too lean, and the cost shows up somewhere other than the balance sheet: stockouts, lost sales, disappointed customers who buy elsewhere, expedited shipping fees, and the loss of bulk purchasing discounts.
A stockout does not appear in any accounting record. That is precisely what makes it dangerous — the cost is real and entirely invisible in the numbers you review.
A single annual turnover figure hides seasonality. If half your sales happen in one quarter, calculate turnover by quarter as well. An annual ratio of 6 could be a smooth business or one that turns 15 times in December and twice in the spring.
The number to act on: carrying cost
Holding inventory costs money beyond the purchase price — warehousing, insurance, shrinkage, obsolescence, and the interest on capital tied up rather than deployed. A common estimate puts total carrying cost at 20% to 30% of inventory value per year.
At the lower end of that range, $80,000 of average inventory costs around $16,000 a year to hold. Cutting days sales of inventory from 61 to 45 releases roughly $21,000 of cash and saves about $4,000 annually. That is a concrete, fundable improvement, and it is usually easier to achieve than the equivalent increase in sales.
The practical route there is rarely uniform belt-tightening. It is identifying the slow-moving lines — often a long tail contributing little revenue while consuming most of the storage — and deciding deliberately whether they earn their place.
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Frequently asked questions
- Should I use revenue or cost of goods sold?
- Cost of goods sold. Inventory is valued at cost, so using revenue mixes price levels and overstates turnover by your gross margin.
- What is days sales of inventory?
- Days in the period divided by turnover — the average number of days stock sits before selling. A turnover of 6 over a year is about 61 days.
- Is higher inventory turnover always better?
- No. Turnover well above your industry norm often signals understocking, which causes stockouts, lost sales and rush shipping costs that never appear in your accounts.
- How do I improve turnover?
- Usually by identifying slow-moving lines rather than cutting stock across the board. Tighter reorder points, shorter supplier lead times and clearing obsolete stock all help.
General information only — not tax, legal, accounting or financial advice. Rates change and individual circumstances vary. Confirm figures with the CRA, the IRS, your state or provincial authority, or a licensed professional before acting on them.
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