Free tool
Inventory Turnover Calculator
Stock that sits costs money: it ties up cash and can lose its value. Inventory turnover tells you how many times your inventory sold and was replaced over the period, and days in inventory tell you how long it would last.
Inventory turnover is the number of times inventory is sold and replaced over a period. It is calculated by dividing cost of goods sold by average inventory, which is the average of beginning and ending inventory. Days in inventory divide that average inventory by the cost of goods sold per day: they show how many days it would take to clear the average inventory.
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How inventory turnover is calculated
Average inventory = (Beginning inventory + Ending inventory) ÷ 2 Inventory turnover = Cost of goods sold ÷ Average inventory Days in inventory = Average inventory ÷ (Cost of goods sold ÷ Days)
Cost of goods sold of 120,000 € over the year, with 18,000 € of inventory at the start and 22,000 € at the end, gives an average inventory of 20,000 €: inventory turned over 6 times, and it covers about 61 days of sales.
Both numbers say the same thing from two angles: days in inventory equal the period length divided by turnover. According to the OpenStax accounting textbook, a turnover that falls from one year to the next may signal an inventory balance too high for the volume of sales, and rising days in inventory, stock that takes too long to sell.
Turnover says nothing about what each sale earns: a product that turns fast on a thin margin can earn less than a slow product with a healthy one. The margin completes the picture.
What the number helps you decide
- Which products to push in ads: a product that turns slowly ties up cash. Featuring it in your campaigns can clear it before it loses its value.
- Which products not to push: according to OpenStax, an extremely high turnover may mean the inventory is too thin for demand. Paying for clicks to a product about to run out costs without selling.
- How you compare with your industry: OpenStax advises comparing the ratio with competitor and industry ratios, never reading it alone.
Frequently asked questions
How do I calculate inventory turnover?
Divide cost of goods sold by average inventory, which is the average of beginning and ending inventory. 120,000 € ÷ 20,000 € = 6 turns over the year.
How do I calculate days in inventory?
Divide average inventory by the cost of goods sold per day, that is cost of goods sold divided by the number of days in the period. 20,000 € ÷ (120,000 € ÷ 365) ≈ 61 days. You get the same number by dividing 365 by the turnover.
What is a good inventory turnover ratio?
There is no universal number: it depends on the industry. According to OpenStax, a higher ratio is preferable, but an extremely high one may mean the company does not have enough inventory to meet demand, and a low one that it holds too much. The useful comparison is with your competitors, your industry and your own past periods.
Where do I find the numbers?
In your accounts: cost of goods sold is on the income statement, beginning and ending inventory on the balance sheet. The beginning inventory of a year is the ending inventory of the year before.
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