How this calculator works
Inventory turnover counts how many times a business sells and replaces its stock in a period. It divides the cost of goods sold by the average inventory held at cost. A high turnover means stock moves quickly, cash is not sitting on shelves and storage costs are lower. A low turnover means slow-moving stock, possible obsolescence and more cash tied up. Turnover on its own is hard to interpret across industries, so it is usually converted into inventory days, the average number of days a unit spends in stock. The reciprocal relationship means a turnover of 5 per year is 73 days on a 365 day year.
Formula
Inventory turnover = cost of goods sold / average inventory. Inventory days = days in the period / inventory turnover. Average inventory = (opening inventory + closing inventory) / 2 or the average balance entered directly. Cost of goods sold = inventory turnover × average inventory. Average inventory = cost of goods sold / inventory turnover.
Worked example
Cost of goods sold of $600,000 and average inventory of $120,000 give a turnover of 5.0 times a year. On a 365 day year that is 73 days of inventory. If the average balance rose to $150,000 with the same cost of goods sold, turnover would fall to 4.0 and inventory days would rise to 91.25.
Advertisement
Frequently asked questions
Is a high inventory turnover always good?
Usually, but not if it comes at the cost of stockouts. A business that runs out of popular items loses sales. The right turnover balances carrying cost against the risk of missing demand, and varies by product line.
Which inventory value should I use?
Use inventory at cost, because the numerator is cost of goods sold. Averaging opening and closing balances smooths seasonality. If the business is growing quickly, a single closing balance understates the average.
How does inventory turnover affect profit?
It affects the cash tied up and the cost of holding stock, not directly the gross margin. A higher turnover frees cash for other uses and reduces storage, insurance and obsolescence costs. It can also reduce the need for borrowing.