What is inventory turnover and is mine healthy?
Inventory turnover shows how many times a year your stock sells through, and the number of days of stock it implies is easier to feel.
A shelf full of stock can look like success, but it can also be a warning. Inventory turnover is a way to tell the two apart. It measures how quickly your stock is sold and replaced.
The formula
Inventory turnover = cost of goods sold in a year divided by average stock value.
Cost of goods sold, or COGS, is what you paid for the products you actually sold during the year. It is not your revenue. Average stock value is what your stock is worth at cost, averaged over the year. A simple approximation is to take the stock value at a few points in the year and average them.
A worked example
Say you sold products over a year whose cost was Rs 3,00,000. Your stock was worth about Rs 50,000 on average.
Rs 3,00,000 divided by Rs 50,000 is 6. You turned your stock over 6 times a year.
Turn it into days
Six turns is hard to feel. Days of stock is easier: divide 365 by the turns.
365 divided by 6 is about 61 days. On average, a unit sits with you for roughly two months before it sells.
Is that healthy?
There is no universal answer. A seller of fresh food or items with an expiry date needs a much quicker turn than someone selling brass lamps or handmade furniture. Compare yourself with yourself over time, and with what makes sense for your product's shelf life and fashion cycle.
Ask these questions instead.
- Is my number going up or down compared to last quarter?
- Does stock sit longer than the product can safely last?
- Are a few bestsellers doing all the work while many other lines barely move?
What happens if you halve your stock
Imagine you keep the same yearly sales but carry only Rs 25,000 of stock on average. Then Rs 3,00,000 divided by Rs 25,000 is 12 turns, and 365 divided by 12 is about 30 days.
You have released Rs 25,000 of cash and cut your holding time to a month. Of course you cannot do this by just wishing. To sell the same amount from half the stock, you must reorder more often, in smaller lots, and your supplier must be able to deliver quickly. You also face a higher risk of running out. The calculations for that are in when to reorder stock and how much safety stock to hold.
How to improve turnover
- Stop reordering the slow lines and clear what is left. See at what price to clear slow-moving stock.
- Buy smaller lots of fast sellers more often.
- Narrow the range. The case for a smaller catalogue makes this argument well.
- Time purchases to your season, so you are not holding festival stock in March.
A warning
Higher turnover is not always better. If you chase a high number by running out constantly, you lose sales and trust. The goal is a rhythm that keeps your best products available without burying your cash in the rest.
Do the calculation once this month with real figures. Keep the result in your notes and compare it again after the next quarter.
To see what the unsold part costs you each month, read the monthly cost of keeping stock on the shelf.