Inventory Turnover

Inventory turnover tells you how efficiently your business is managing its stock. It measures how many times you sell through your entire inventory during a given period, usually a year. The formula is: Inventory Turnover = Cost of Goods Sold ÷ Average Inventory. Average inventory is typically (Beginning Inventory + Ending Inventory) ÷ 2.

A high turnover rate means you're selling products quickly and not tying up too much cash in unsold inventory. A low turnover rate means products are sitting on shelves — which costs you money in storage, potential spoilage or obsolescence, and opportunity cost (that cash could be used elsewhere). You can also express this as "days sales of inventory" (DSI): 365 ÷ Inventory Turnover = average number of days it takes to sell your inventory.

What counts as "good" turnover varies dramatically by industry. A grocery store might turn inventory 14-20 times per year (every 2-3 weeks). A furniture store might turn it 4-6 times per year. A jewelry store might turn it 1-2 times per year. The key is comparing your turnover to industry norms and tracking your own trend over time. A declining turnover rate is a warning sign that you're overstocking, demand is softening, or your product mix needs adjustment.

Inventory sitting in your warehouse is cash that's not in your bank account. Every dollar tied up in unsold inventory is a dollar that's not earning interest, paying down debt, or being invested in marketing that could drive more sales. Poor inventory management is one of the leading causes of cash flow problems in product-based small businesses. An inventory turnover ratio also tells you about the health of your purchasing decisions — are you buying the right products in the right quantities? If you have a turnover of 2 but your industry average is 8, you're over-ordering or selling the wrong things.