What is Inventory Turnover?

Inventory turnover is a key metric that shows how many times a company has sold and replaced inventory during a given period. A higher turnover generally indicates strong sales or effective inventory management, while a lower turnover may suggest overstocking or weak sales.

The Formula

The inventory turnover ratio is calculated as:

$$
\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold (COGS)}}{\text{Average Inventory}}
$$

Where:

• COGS: The direct costs attributable to the production of the goods sold in a company.
• Average Inventory: The average value of inventory during the period (usually (Beginning Inventory + Ending Inventory) / 2).

Why It Matters

• Cash Flow: Faster turnover means cash is tied up in inventory for less time.
• Storage Costs: Lower turnover means higher storage and holding costs.
• Obsolescence: Slow-moving inventory risks becoming obsolete or expired.

How to Use This Calculator

1. Enter COGS: Input your total Cost of Goods Sold for the period (e.g., 1 year).
2. Enter Inventory Values: Input your beginning and ending inventory values.
3. Get Results: See your turnover ratio and the average days it takes to sell your inventory.

Interpreting Your Score

• High Ratio: Strong sales or insufficient inventory (risk of stockouts).
• Low Ratio: Weak sales or overstocking (risk of obsolescence).
• Days to Sell: The average number of days it takes to clear your inventory.