Inventory Turnover Ratio
Inventory turnover is a financial ratio that shows how many times a company has sold and replaced inventory during a given period. It measures how efficiently inventory is managed.
Where:
- Cost of Goods Sold (COGS) = The direct costs attributable to the production of goods sold
- Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Inventory Turnover Calculator
Calculation Results
Inventory Turnover Ratio
Days in Inventory
How to Use This Inventory Turnover Calculator
Our inventory turnover calculator helps you measure how efficiently your inventory is being managed. Follow these steps:
- Enter Cost of Goods Sold: Input your total cost of goods sold for the accounting period
- Set Accounting Period: Specify the number of days in your accounting period (typically 365 for a year)
- Enter Inventory Values: Provide your beginning and ending inventory values for the period
- Calculate: Click the calculate button to see your inventory turnover ratio and days in inventory
The calculator will provide your inventory turnover ratio, days in inventory, and an interpretation of what these values mean for your business.
What is Inventory Turnover? Understanding Inventory Efficiency
Inventory turnover is a key performance indicator (KPI) that measures how many times a company's inventory is sold and replaced over a specific period. A higher turnover ratio generally indicates better inventory management and stronger sales, while a lower ratio may suggest overstocking, obsolescence, or weak sales.
The inventory turnover ratio is important because:
- It indicates how efficiently inventory is being managed
- It helps identify slow-moving or obsolete inventory
- It impacts cash flow - higher turnover means faster conversion of inventory into cash
- It influences storage costs and risk of inventory obsolescence
- It provides insights into sales performance and demand forecasting accuracy
Industry benchmarks vary significantly, so it's important to compare your ratio to industry averages and your own historical performance.
Inventory Turnover Formula with Example
Let's examine the inventory turnover formula with a practical example:
Example: A company has the following financial data:
- Cost of Goods Sold: $500,000
- Beginning Inventory: $75,000
- Ending Inventory: $85,000
- Accounting Period: 365 days
Using the inventory turnover formula:
Therefore, the company turns over its inventory 6.25 times per year, and it takes approximately 58.4 days to sell through the average inventory.
Frequently Asked Questions about Inventory Turnover
The ideal inventory turnover ratio varies by industry:
- Retail grocery: 10-15 times per year
- Automobile parts: 6-8 times per year
- Furniture: 3-4 times per year
- Luxury goods: 1-2 times per year
A "good" ratio is one that is better than your industry average and shows improvement over time. Very high turnover might indicate stockouts, while very low turnover suggests overstocking.
Strategies to improve inventory turnover include:
- Implement better demand forecasting
- Use inventory management software
- Establish optimal reorder points and quantities
- Run promotions on slow-moving items
- Improve supplier relationships for faster restocking
- Regularly review and adjust product assortment
- Implement just-in-time (JIT) inventory practices
While related, these metrics provide different perspectives:
- Inventory Turnover Ratio: Measures how many times inventory is sold and replaced during a period
- Days in Inventory: Measures the average number of days items remain in inventory before being sold
They are mathematically related (Days in Inventory = 365 / Inventory Turnover), but days in inventory is often easier to interpret for operational planning.
The standard formula uses Cost of Goods Sold (COGS) rather than sales because:
- Inventory is valued at cost, not selling price
- Using sales would inflate the ratio and make comparisons difficult
- COGS provides a more accurate measure of inventory movement
Some retailers use sales in the numerator, but this is non-standard and makes cross-company comparisons problematic.
Inventory turnover should be calculated:
- Monthly: For regular monitoring and quick adjustments
- Quarterly: For formal reporting and trend analysis
- Annually: For year-over-year comparisons and strategic planning
Many businesses calculate it monthly to identify trends and make timely inventory decisions. Seasonal businesses should compare the same periods year-over-year rather than consecutive months.
Key Inventory Turnover Terminology
| Term | Definition |
|---|---|
| Inventory Turnover Ratio | Measures how many times inventory is sold and replaced during a period |
| Days in Inventory | The average number of days items remain in inventory before being sold |
| Cost of Goods Sold (COGS) | The direct costs attributable to the production of goods sold |
| Average Inventory | The average value of inventory during a period, typically (Beginning + Ending)/2 |
| Beginning Inventory | The value of inventory at the start of the accounting period |
| Ending Inventory | The value of inventory at the end of the accounting period |
| Stockout | When inventory is unavailable to meet customer demand |
| Obsolescence | When inventory becomes outdated or unsellable |