Inventory Turnover Explained
Inventory turnover measures how many times your business sells through and replaces its stock during a given period.
What inventory turnover means
It's a ratio that tells you, in plain terms, how fast products move off your shelves. A high turnover means you're selling quickly; a low turnover means stock is sitting around.
Why it matters for small business
Inventory ties up cash. Every dollar in unsold stock is a dollar you can't spend on rent, marketing, or new opportunities. Slow turnover often signals overstocking, poor demand forecasting, or aging products.
Simple formula
Average inventory is usually (opening inventory + closing inventory) ÷ 2.
Practical example
A small bookshop has annual COGS of $60,000. Inventory at the start of the year was $14,000 and at the end was $16,000, so average inventory is $15,000.
The shop sells through its full stock about 4 times a year — roughly once every 3 months.
Practical interpretation
- A very low turnover may mean too much capital is locked in slow products.
- A very high turnover may mean you're risking stockouts and lost sales.
- Track turnover by product category — averages can hide problem items.
Common mistakes
- Using sales instead of COGS. The standard formula uses COGS so margin doesn't distort the result.
- Comparing across very different industries. A grocer and a furniture shop will never have similar turnover.
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This article is for educational and planning purposes only. It is not accounting, tax, legal, investment, or financial advice.