How to calculate inventory turnover
Stock is cash you have already spent and cannot use. Turnover tells you how long it stays that way.
The short answer
Inventory turnover is cost of goods sold divided by average inventory at cost, and it tells you how many times a year you sell through your stock. Dividing 365 by it gives days on hand, which is the more useful of the two because it converts directly into how long your cash is tied up.
The formula
average inventory = (opening inventory + closing inventory) / 2
turnover = cost of goods sold / average inventory
days on hand = 365 / turnover
cash released by a higher turnover = COGS/old turns - COGS/new turns
Both figures must be at cost. Dividing revenue by inventory valued at cost is a common error and it inflates the result by your entire gross margin, which makes a slow business look fast.
Worked example
A shop with $186,000 of cost of goods sold, $31,000 of stock at the start of the year and $27,000 at the end:
average inventory = (31,000 + 27,000) / 2 = 29,000
turnover = 186,000 / 29,000 = 6.41 times
days on hand = 365 / 6.41 = 56.9 days
at 8 turns: average inventory = 186,000 / 8 = 23,250
cash released = 29,000 - 23,250 = 5,750
Going from 6.4 turns to 8 frees $5,750 without selling anything extra. It is the cheapest financing most small retailers have available and it does not involve a bank.
Why the average matters more than it looks
Opening and closing balances are a rough average and they hide seasonality badly. A shop that builds stock for a Christmas peak and measures on 31 December is measuring its emptiest moment, which flatters the number considerably.
If you can, average twelve month-end balances rather than two. The figure usually drops and the drop is the honest part.
One number for the whole shop hides everything
A blended turnover of 6.4 can be twenty lines turning fifteen times and thirty lines turning twice. The fast movers subsidise the slow ones in the average and nothing about the total tells you which is which.
Turnover by product or category is where the decisions are. It is also where you find the stock that has not moved in a year and is still being counted as an asset at full cost.
Faster is not automatically better
Very high turnover with frequent stockouts is a business losing sales it never records. Nobody logs the customer who wanted the thing you did not have, so this failure is invisible in every report you run.
The useful pairing is turnover next to stockout frequency. Rising turnover with steady availability is genuinely better; rising turnover with more empty shelves is just a smaller shop.
What this leaves out
- Inventory is valued at cost, consistently, across both dates. A change in valuation method between the two makes the ratio meaningless.
- Excludes stock on order and consignment, which affect cash but not the balance being measured.
- Assumes a full year. Annualising a quarter distorts any business with a season.
This arithmetic is free to run in your browser — no signup, nothing held back.
Open the free calculatorCommon questions
- What is a good inventory turnover ratio?
- It depends entirely on what you sell. Grocery runs in the dozens, furniture in low single digits, and comparing across categories tells you nothing. Compare against your own last four quarters instead, where the only thing that changed is you.
- Should I use revenue or cost of goods sold?
- Cost of goods sold. Using revenue against inventory held at cost mixes two different bases and overstates turnover by your gross margin, so a 50% margin business looks twice as efficient as it is.
- How do I improve turnover without risking stockouts?
- Order smaller and more often on the lines that move, and clear the ones that do not even at a loss. Slow stock does not become worth more by being kept, and the shelf space and cash it occupies both have a better use.
Spreadsheets that do this
The formulas above, already built and checked — so you fill in your numbers rather than the arithmetic.
Related guides
Last reviewed 22 August 2026