What is inventory turnover and how do you calculate it?
Inventory turnover tells you how many times your average stock was sold and replaced during a period. It is the quickest way to see how long your money sits on the shelf.
Inventory turnover = cost of goods sold for the period ÷ average inventory value. Average inventory is the mean of the opening and closing stock value. A turnover of 6 means the stock was replaced six times in that period.
The formula and its parts
You need three figures, all for the same period and valued the same way (for example at weighted average cost). Using selling prices on one side and cost on the other inflates the result.
- Cost of goods sold: the purchase cost of everything sold in the period
- Average inventory value: (opening stock value + closing stock value) ÷ 2
- Days of inventory: days in the period ÷ inventory turnover
What a high or low turnover tells you
High turnover means stock sells quickly and little cash is tied up on the shelf. If it is very high you may be running out too often, so check your low-stock levels and supplier lead times.
Low turnover can point to slow movers, overbuying or stock at risk of going out of date. There is no single right figure: groceries and spare parts turn at very different speeds. The most useful comparison is the same product group against its own earlier periods.
Where the numbers come from in GiroPS
The Profit & Loss report gives cost of goods sold for the period you choose, calculated at weighted average cost. Stock value appears in the stock report and the business overview, based on the positive quantity of stock-tracked products.
Note the stock value at the start and end of the period, average the two and divide cost of goods sold by that average. Products without a purchase price are not valued correctly, so fill in missing costs first.
Practical scenario
Example: one quarter
A store's cost of goods sold over three months is 180,000. Stock was worth 50,000 at the start of the quarter and 40,000 at the end. Average inventory is (50,000 + 40,000) ÷ 2 = 45,000, so turnover is 180,000 ÷ 45,000 = 4. Over 90 days that is 90 ÷ 4 = 22.5 days of inventory: on average an item sells within about three weeks.
Frequently Asked Questions
Can I calculate turnover from sales revenue?
You can, but the result comes out too high because selling prices include your profit. Stock is valued at cost, so using cost in the numerator keeps both sides consistent. If you do use revenue, say so wherever you report it.
Which period should I use?
A month, a quarter or a year all work; what matters is comparing periods of the same length. For seasonal products a yearly figure smooths out a misleading single month.
How can I improve inventory turnover?
Buy smaller quantities of slow movers, set low-stock levels for fast sellers from real sales, and spot early the stock you will need to clear with a discount. The aim is not an empty shelf but the same sales with less cash tied up.