Inventory Turnover
AdvancedInventory turnover is the number of times a business sells and replaces its inventory during a period, usually calculated as cost of goods sold divided by average inventory.
Inventory turnover shows how efficiently a business manages its stock. Higher turnover means goods are sold quickly, so less cash is tied up in inventory and there is less risk of goods becoming outdated or damaged.
For example, a retailer with annual cost of goods sold of 1,200,000 and average inventory of 200,000 has an inventory turnover of 6. On average, it sells through its stock about every 61 days, which is 365 divided by 6.
What counts as good turnover depends on the industry. Supermarkets selling perishable food turn their inventory many times a year, while furniture or jewellery retailers turn it much less often.
A falling turnover may signal weak sales or overstocking. A very high turnover can be efficient, but may also mean the business risks running out of stock and losing sales. Turnover is closely linked to days inventory outstanding, which expresses the same idea in days.
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