Inventory Turnover: What is it, a Beginner’s Guide

Sam Phipps

Last updated: November 27, 2023 | 8 minutes
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How inventory turnover can boost your bottom line

Your inventory could be an untapped goldmine. Manage it well and you will unlock all the riches you and your Finance Director desire. But only if it’s managed in the right way.

Managed poorly, however, your inventory is nothing more than a big hole in the business where money’s shovelled in, like a steam train using bank notes to run up a mountain.

Supply chain inefficiency will kill your results and your bank balance. So, how can you work your inventory as hard as possible? How can you reap the rewards from every penny you invest? And how do you make sure your inventory makes money, not drains it?

Less is more.

You want the maximum value you can achieve. And crucially, the highest profits you can muster, from the smallest amount of stock.

Therefore, when it comes to inventory levels, less is more.

That’s not an easy quest. To make sure it’s anywhere close to achievable, you need to make every pound you spend count. And that’s why we wrote this article.

Throughout this blog, we’ll tell you everything you need to know about inventory turnover.

We’ll talk about how you can use your inventory turnover to assess efficiency. We’ll delve into what a ‘good’ Inventory turnover rate looks like. And we’ll even explore some practical strategies to make your inventory turnover faster.

Let’s start at the beginning.

What is inventory turnover?

Inventory turnover is a simple ratio. However, this powerful formula can reveal some critical information about the health of your supply chain processes.


How many times have you sold and replaced your inventory during a specific period?

You can calculate your rate of inventory turnover by dividing the cost of goods sold by the average inventory value.

Let’s make it easy and logical, and say it’s over a 12 month period.

A higher inventory turnover ratio would indicate a better sales strategy and a more efficient approach to inventory management.

On the other hand, a lower rate of inventory turnover number, or ratio, would show the opposite. Either you need to light a fire in the sales team, or you have excess inventory you can’t shift.

Of course, this is not always the case (and we’ll talk more about this later) but in essence inventory turnover is a very handy ratio indeed. Read on to the next section to find out more.

Now, we could apply the inventory turnover ratio to your entire assortment, individual product categories or even to a specific SKU. Although, it’s important to note that inventory turnover is based on an average.

Why is inventory turnover important?

Being able to get an instant snapshot of your company’s efficiency should always be welcomed. Even if you don’t like the answer. Your inventory turnover rate will give you this picture.

Your inventory turnover can reveal lots of telling things about your business. However, here are 3 of the most important reasons you should utilise the Inventory Turnover formula:

Inventory Turnover Search


Reason number one: Cash flow

You might think having stock in situ, ready and waiting to get sold is a benefit to business. And in some cases, it can be. However, if you are holding more stock than you really need, it might be the opposite.

Afterall, the longer that stock sits in your warehouse, the longer you have to wait until you see your original investment again.

A higher stock turnover rate suggests that your inventory management approach is more effective at converting stock into cash.

And naturally, selling an item in a quicker fashion means you receive the money from that sale faster too. This, in turn, will improve your cash flow, speed up your cash-to-cash cycle and make your Profit & Loss Statement nicer reading.

You’ll have more cash in the bank, be able to spot and take advantage of more growth opportunities and pay off debts faster too, decreasing interest and making things look all the rosier.

Top tip: Check our blog on working capital to find out how you can optimise your investment in stock to improve your ROI and ensure a healthier cash flow.

Reason number two: Cost management

If your inventory turnover rate is low, you might be holding on to too much stock. And that can come with pitfalls aplenty.

Firstly, it’ll tie up your working capital. But it’ll also increase the storage and holding costs. And, if you need more warehouse space, that won’t come cheap.

That’s before we’ve considered the increased risk of losing inventory to obsolescence. Losing revenue because you’ve thrown half your stock in an incinerator really isn’t a good look.

Put simply, the inventory turnover ratio formula can be a handy tool to detect if your supply chain costs are running away.

Top tip: The true cost of holding inventory might surprise you. Discover how you can calculate your supply chain costs and proactively reduce them with our inventory cost cheatsheet.

Reason number three: Risk management

Keeping close tabs on your inventory turnover can also help limit the risk you leave yourself open to. It increases the knowledge you have, and therefore leaves fewer things to chance.

In inventory management that’s a positive. As they say, knowledge is power.

Anywhere you can make an informed decision over a wild stab in the dark will help your business and should be prioritised.

Careful monitoring will help your operations and financial strategy. It’ll highlight areas to improve and provide hints on where to optimise.

And what’s more, by taking steps to continuously improve your stock turn, there will be more money flying about to respond to unexpected disruption as required.

Top tip: Supply chain management is all about managing risk. Sure, disruption is not a new concept. But in recent times, it seems the scale and impact of supply chain shocks has increased exponentially. Find out what steps you can take to mitigate risk with our guide to supply chain resilience.

How can you calculate your inventory turnover?

Inventory turnover is a great way to track efficiency.

However, the formulas to gauge the efficiency of your inventory management, are plentiful. There are several ways of measuring it.

Here are a few of them.

Inventory turnover ratio:

This is the one we’re predominantly talking about today and is a hugely popular way of analysing the success of your inventory optimisation goals.

This ratio, as we mentioned above is a simple measurement: How many times have you sold and replaced your inventory during a specific period?

It’s usually a year but can differ by company.

The formula looks like this:

Inventory Turnover = COGS (Cost of Goods Sold) / Average Inventory Value

If you were to have an inventory turnover rate of 6, you’ve sold and replaced your inventory 6 times during that period. Happy days.

Days inventory outstanding (DIO):

‘Stock days’, ‘inventory on hand’, ‘inventory turnover days’ or the above, ‘days inventory outstanding’ – these all refer to the same calculation.

Days inventory outstanding is another simple formula that measures the average number of day’s worth of inventory you hold.

Naturally, a lower DIO means you’re shifting products out the door quicker, and have fewer days with them being a burden.

That’ll therefore mean you’re more productive and more efficient.

A higher inventory turnover ratio will indicate the opposite.

The way to work out your inventory turnover days formula (or DIO) is:

Average Inventory / Cost of Goods Sold X 365 (for the yearly average).

Gross Margin Return on Investment (GMROI):

There’s a difference in value between what you paid for your stock, and what your customer will buy it for.

At least, hopefully, there is, and it’s in your favour. If not, your business might be in deep trouble.

This difference can be calculated using the Gross Margin Return on Investment (GMROI) ratio.

The way to work this out is:

GMROI = Gross Profit / Average Inventory Cost

A lower number here will suggest you have too much inventory or you’re not selling for a high enough margin. A higher ratio or number is a good sign and it means you’re getting a great ‘bang for your buck’.

Inventory carrying cost ratio:

If you were to add up all the costs of carrying inventory, how much would it total up to? We’re talking the price to buy, store, ship, insure, and cover all of the warehouse operators, overheads, the lot.

This formula will work that out for you.

Inventory Carrying Cost ratio (%) = Total Carrying Costs / Total Inventory Value X 100

If you arrive at a low ratio, it indicates you’ve got an efficient inventory management process. Conversely then, a higher ratio suggests you’re holding too much inventory and that it’s eating up your margins..

Obsolete inventory ratio:

Many of the formulas above can highlight that you may have an excess stock issue. And there are lots of reasons why excess stock is a problem. But what percentage of your inventory can you no longer sell?

To work that out, and analyse how much that’s costing you, use this formula…

Obsolete Inventory Ratio = Value of Inventory Items with No Recent Usage / Total Inventory Book Value.

Whether you define “No recent usage” as no sales in the last 6 months or last year, is up to you.

However, a lower ratio will suggest you’re managing your inventory fairly well and cutting out waste wherever you can. A higher ratio will denote the opposite and highlight a potential problem that needs fixing.

Inventory Turnover Whiteboard

What does a good stock turn look like?

All of the above formulas are useful in their own way.

But for this next part we’ll focus on inventory turnover… given this article’s title.

What ‘good’ looks like in a stock turn will differ depending on what you sell, and the industry you’re in. The general consensus is, ‘good’ is between 4 and 6.

The theory suggests a high inventory turnover ratio means you’re managing inventory efficiently. But it might also suggest you’re not keeping enough to meet the demand at your doorstep.

If you think about FMCG or food companies, the stock turn will be very high. It’s impossible to keep some food products sitting on your shelf for a long time, and therefore a stock must rotate every few days to keep the products fresh.

This will see the stock turnover figures rise well into double figures. But let’s not forget, there is always a high risk of obsolescence.

Compare that with other businesses, like a company that distributes car parts for vintage vehicles and the difference is dramatic. A stock turn here might be 1, or 2.

The pertinent point here is, ‘good’ looks different to all of us.

Your business will have a different idea of ‘good’ to the company at the neighbouring address.

What could impact your company’s stock turn?

The quick answer to this is several things. But let’s look at them all in a little detail.

1. Sales volume:

If you increase your sales, the higher your stock turn ratio will be. Presuming, of course, your inventory levels remain stable.

Higher demand will naturally mean your products are sold quicker and therefore have a higher stock turn ratio than those with slower sales which stay in your warehouse for longer.

2. Inventory levels:

Keeping hold of excess inventory might lower your stock turn ratio. If you’re not selling it, and it remains sat on your warehouse shelves, and on the books, that’s going to impact things.

But once again, this is a balancing act. Being too quick to cut inventory levels may mean you’re not prepared should demand pick up again.

And that will, in turn, affect your ratio as you struggle to meet customer demand.

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3. Lead times, Supplier reliability & demand volatility:

Let’s say you pay £100,000 for a container’s worth of stock for one product. But that inventory takes 4 weeks to arrive.

You’d have to make sure you have enough stock already on hand to cover demand until your new inventory arrives. And what if that’s delayed by another 2 weeks?

What if your supplier can’t find a container, or doesn’t have the staff to prepare the order? Do you have the availability now to cover the shortfall?

What about on the customer side? If you expect to sell 1000 units but the customer decides to order 1200, you now have a problem on your hands.

Of course, this is why we invest in safety stock. And the greater the risk of volatility, the higher the requirement for a buffer (depending on your service levels!).

But again, this additional investment in stock will have a huge impact on your stock turn ratio.

Top tip: If you would like to see just how much of an impact market uncertainty can have on your stock turnover ratio, check out our article on the Bullwhip Effect.

4. External factors:

You’re never far away from an external factor affecting your company. You only have to be in business for 6 months to realise that.

And the best planning in the world sometimes offers little help.

An economic downturn will impact your customers, and in turn, their desire for your wares. This will obviously impact your stock turn ratio, as it cuts into sales volumes and raises inventory levels in one fell swoop.

Likewise, if your closest competitor’s main distribution centre was suddenly hit by a meteorite, you might find that as the only remaining vendor, your products fly off the shelves!

What can we do about these external factors? In short, probably not much.

But what’s important here is that we focus on the factors we can control.

How to improve your inventory stock turnover rate

Strategy, strategy, strategy. And planning.

That’s how you improve your inventory stock turnover rate. But let’s go into detail so you can implement your strategy effectively.

Inventory Turnover Gears

First, you need to balance your inventory levels.

Holding the right amount of stock is crucial to improving your stock turn. Knowing which items to hold, and which to burn in a ritualistic fire out the back.

And knowing which items you need to invest in is the only way to do that.

You simply have to review your inventory levels regularly and alter them considering demand, lead times, appropriate sales data and target service levels. Yes, you’re going to have to cut some products that just don’t sell.

Sometimes it’s better to cut your losses.

Secondly you need to optimise your approach to demand planning.

Improving your stock turn’s made all the easier with a clear picture of future demand. But short of a crystal ball, it can be hard to do.

But the more accurate you can be, the closer you can align inventory to actual order numbers, and therefore limit excess.

Top tip: When you are trying to align supply with demand, visibility is the crucial ingredient. Read our step-by-step guide to better demand planning to find out how you can achieve a clearer picture of future demand.

After that, you need to streamline your supply chain processes.

Finding steady, reliable supply partners who always ship when they say they will, and never miss orders or items is crucial to increasing your stock turn.

The more you can optimise your supply chain process, the better it is for your bottom line.

And this might not all be about finding a supplier who promises the world. You can make changes and improvements at home before looking outward.

Do you need all the stock you’re asking for, right now? Can you order it from one supplier instead of many? Can you implement a more robust process, anywhere down the line?

Embracing collaboration will also help.

How often do you speak to Marketing? Have they been pushing the right products? Would a higher ad spend bring more sales? Do the market conditions favour an alternative approach for your inventory?

What does the Sales team have to say about your ability to meet demand? Could more be unlocked? Or are you leaving revenue on the table regularly?

The points I’m making with both of the above is to highlight how important collaboration is to most businesses. It’s the glue that makes for seamless operations.

The more a company works together, the higher its confidence in meeting customer demand with less stock. The holy grail of inventory turnover.

Top tip: Thankfully, this is where S&OP comes into its own. Here are a few tips to get you started with Sales & Operations Planning.

And finally, invest in inventory management technology.

It wouldn’t be a long-form article without a neatly placed plug for Slim4, and here it is.

There’s good news if this all feels like a bit much, because Slim4 can solve your inventory woes without ever feeling dizzy looking at spreadsheets again.

There are lots of moving parts involved in making your inventory turnover work seamlessly. And Excel probably won’t cut the mustard.

To work your inventory as hard as possible, you need a tool that supports your people and processes and give you easy collaboration, for all departments in your business.

Click here and your woes will be a forgotten memory.

FAQs about Inventory Turnover

What is inventory turnover?

Inventory turnover is a handy financial ratio that measures how quickly a company rotates its inventory over a certain period of time.

What is a good inventory turnover?

Generally speaking, the higher the inventory turnover, the more efficient your inventory is managed. However, stock turns vary from industry to industry.

How to calculate inventory turnover?

he formula to calculate inventory turnover is:

Inventory turnover = Cost of goods sold / Average inventory

Why is inventory turnover important?

Inventory turnover provides interesting insights into how well your inventory is managed. Furthermore, it indicates where your inventory is helping or hindering your cash flow.

What causes inventory turnover to increase?

You can improve your inventory turnover in a number of ways. On one hand you can increase sales. Alternatively, you can optimise your inventory to fulfil customer demand with less stock.

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