Inventory turnover tells you how many times a business sells and replaces its stock in a year. A high number usually means stock moves fast. A low number means money is sitting on shelves. Both the ratio and its partner number, days to sell, are easy to work out from two figures you already have.
The two formulas
Inventory turnover = cost of goods sold (COGS) / average inventory. COGS is what the goods you sold cost you, not what you sold them for. Average inventory = (opening inventory + closing inventory) / 2. Using the average matters because a single end-of-year snapshot can be misleading if stock was unusually high or low that day.
Days to sell = 365 / inventory turnover. This converts the ratio into plain language: how many days, on average, does an item sit before it sells? A turnover of 6 means about 61 days to sell.
Worked example
A small shop has COGS of $240,000 for the year. Opening inventory was $35,000 and closing inventory was $45,000, so average inventory is ($35,000 + $45,000) / 2 = $40,000. Turnover = $240,000 / $40,000 = 6 turns per year. Days to sell = 365 / 6 = 60.8, about 61 days.
That means the shop replaces its whole stock about six times a year, and a typical item sits for two months. Whether that is good depends on the trade: fresh food sellers turn stock weekly, while furniture sellers may turn it only a few times a year. Compare with similar businesses, not with an unrelated industry.
What the result tells you
Very low turnover often means overstocking, slow-moving lines, or stock bought at the wrong time. The fix is usually to clear old lines, order less, or reorder more often in smaller batches. Very high turnover sounds great but can mean stockouts, rushed orders, and lost sales when a popular item runs out.
Track the ratio every quarter rather than once a year. A sudden fall can flag a buying mistake months before it shows up as a cash problem. A sudden rise can flag that you are cutting stock too close and risking empty shelves.
Checklist before you trust the number
Use COGS, not sales revenue, or the ratio will be inflated by your profit margin. Use average inventory, not just the closing figure. Exclude one-off write-offs from COGS if they would distort a normal year. And if your business is seasonal, compare the same quarter last year rather than a quiet quarter with a busy one.
Turnover by category beats one overall number
An overall turnover of 6 can hide a fast category and a slow one. Split the calculation by category and the picture sharpens. Category A: cost of goods sold $120,000, average inventory $15,000, turnover 8, days to sell 46. Category B: cost of goods sold $120,000, average inventory $25,000, turnover 4.8, days to sell 76.
Category B is tying up $10,000 more stock for the same sales. That is where clearance, smaller reorders, or a discontinued line belongs, not spread evenly across the shop. Recompute by category each quarter, and rank categories by days to sell: the longest ones get attention first.
Try it faster with the tool
You can follow every step above by hand, but the free Inventory Turnover Calculator — Turns per Year & Days to Sell does the arithmetic for you. Enter your numbers and it gives the answer right away, so you can check your hand calculation or skip straight to the result.
Quick tips
- Turnover uses COGS, never sales revenue.
- Days to sell = 365 / turnover.
- Compare with similar businesses and with your own past quarters.