Inventory Turnover

What is Inventory Turnover?

Inventory Turnover describes how frequently a company sells and replaces its inventory in a given timeframe. This KPI is expressed as a ratio between goods sold in a period and the average inventory of this same period (usually annual).

A high Inventory Turnover indicates that your business is selling goods easily, but a low Inventory Turnover indicates your sales are weak. It can also mean that you simply have too much stock on hand.

Inventory Turnover is a relevant KPI for your finance team to track.

Why is tracking your Inventory Turnover important?

Besides providing insights into your sales and marketing strategy, evaluating Inventory Turnover allows businesses to make informed decisions about stocking and selling their products in the future. Businesses can compare their turnover rate to previous periods, their forecast as well as others in the same industry, giving them invaluable data into their products’ market effectiveness.

Having a high Inventory Turnover has other benefits too: a company with a high Inventory Turnover will save quite a bit on storage, facility, and insurance costs.

How to calculate Inventory Turnover

To calculate Inventory Turnover, divide your COGS (cost of goods sold) by the average inventory for the period, annual or otherwise.

To find the average inventory, subtract the amount of inventory at the end of the period from the amount of inventory at the beginning of the period, and divide by 2.

Best practices for Inventory Turnover

Because Inventory Turnover is a direct reflection of your sales success, a high Inventory Turnover means that business is thriving. If this describes your company, consider increasing your stock if financially feasible.

A high Inventory Turnover is a bellwether of other crucial components of your business strategy: it means your marketing and sales departments have found their ICP and a winning sales formula. Of course, it also means your product is highly desirable and of high quality. If your turnover is high, keep up the good work!

A low Inventory Turnover, however, means that sales are lagging. This could be due to any number of factors:

• Your sales and marketing efforts aren’t hitting the mark,
• Your product hasn’t met requisite industry standards,
• You’re targeting the wrong people.

If either of these are the case, it’s time to reevaluate your business strategy, and take your product back into development if necessary.

Bear in mind that industry benchmarks for Inventory Turnover will vary.

Other KPIs similar to Inventory Turnover include:

• Working Capital
• Accounts Receivable and Payable