What is Inventory Turnover? What is the formula and why it is important

Inventory turnover is a critical metric that helps businesses understand their stock management. Without careful consideration of this key figure, companies are faced with the risk of carrying excess inventory, increased storage costs and potential loss in sales. Becoming well-versed in how to calculate, understanding the importance and best practices for optimizing your inventory turnover can make all the difference for an organization’s financial performance. In this blog post, we will delve into what inventory turnover is, why it matters so much to business success and how you can maximize it for maximum profitability. Stay tuned as we uncover everything there is to know about inventory turnover!

What is Inventory Turnover?

Inventory turnover is a key financial ratio for assessing a company’s operational efficiency. A higher inventory turnover indicates that a company is selling off its inventory quicker, which is generally seen as a good thing since it means that the company isn’t tieing up too much capital in unsold inventory. However, there are some caveats to keep in mind when interpreting this ratio – namely, that companies in different industries will have different ideal levels of inventory turnover due to differing business models and product lifecycles. Nonetheless, tracking your company’s inventory turnover on a regular basis is a good way to get insights into how efficiently your operations are running.

Why Is It Important For Startups To Track This Metric?

Startups are always looking for ways to maximize their business potential, and one important way to do this is by tracking inventory turnover. Knowing how quickly products are moving from the shelves allows a business to order the correct quantity of items they need while also determining what customers are purchasing most. This is essential in keeping a successful startup afloat, as it allows them to take advantage of ordering in bulk to reduce costs or even spending on new ads highlighting popular products that customers gravitate towards. Additionally, tracking inventory turnover keeps startups informed about changes in seasonal demand or any new trends that can be taken advantage of through promotional campaigns — this ensures that the demand for their product is met efficiently and cost-effectively. Ultimately, entrepreneurship revolves around optimizing resources and managing risk; with reliable data from tracking inventory turnover, startups can stay ahead of their competition and remain profitable even in an ever-changing market.

How do you calculate Inventory Turnover?

Inventory Turnover= Average Value of Inventory



COGS=Cost of goods sold

Calculating your business’s inventory turnover gives you a great insight into how efficiently the stock is being managed and sold. To calculate inventory turnover, you’ll need to know the average value of your inventory for a given period (typically expressed in months) and the cost of goods sold over that same period. By dividing COGS by the average value of inventory and then multiplying it out, you will have an accurate number which reflects the speed at which items held in inventory are sold during a specific time frame. Knowing this number will give you valuable insight into your operational efficiency.

What factors affect  Inventory Turnover

Here are the factors that affect inventory turnover:

Sales volume

The higher the sales volume, the more often you need to restock inventory and thus increase your inventory turnover.

Product shelf life

Different products have different shelf lives, which can affect the rate at which a business needs to replenish its stock. Short shelf life items require more frequent restocking, thereby increasing turnover.

Inventory carrying costs

The cost of storing and maintaining inventory can greatly affect the turnover rate. The higher the cost, the more businesses are incentivized to sell items quickly and restock often in order to reduce these expenses.

Lead times

The time it takes for a business to replenish its inventory can vary greatly depending on the suppliers and vendors they work with. Longer lead times mean more time between restocking, which could ultimately lower the turnover rate.


Businesses located in areas with higher demand have a higher likelihood of selling more items faster than businesses in slower-moving markets. This can increase their inventory turnover rate.

Product pricing

Price points can affect the rate at which items move off the shelves, either increasing or decreasing inventory turnover. Higher priced products typically have lower turnover rates while lower priced products tend to have higher rates of turnover.

By understanding these factors and how they impact inventory turnover, businesses can make informed decisions about their inventory management and potentially improve efficiency.

What are the effects of  Inventory Turnover on a startup?

Here are the typical effects of inventory turnover on a startup:

Higher cash flow

A higher turnover rate means that the company is selling more inventory and thus getting paid sooner, resulting in a healthier cash flow.

Cost savings

Holding fewer inventory items in stock means less cost of goods sold, leading to lower purchasing and stocking costs.

More accurate forecasting

Having a better sense of demand can help with more accurate forecasts when planning for future orders and production needs.

Better customer service

By having the right amount of inventory on hand at all times, businesses can better meet customer orders and ensure timely delivery which will help to foster loyalty.

Increased profits

Lower cost of goods sold coupled with increased sales volume leads to higher profits. This is especially beneficial for startups that have limited budgets and resources.

Overall, inventory turnover is an important factor to pay attention to when running a startup. Not only can it save costs and increase cash flow, but also help to better meet customer demands and bring higher profits. It is important to regularly monitor inventory levels and adjust them as needed in order to optimize the business operations. By doing so, startups can be sure they are making the most of their resources and maximizing sales potential.

What is a good  Inventory Turnover?

Good inventory turnover means that products or materials in a business are being moved and replaced quickly. Having good inventory turnover allows businesses to effectively manage their resources, reduce waste, and remain profitable. A healthy inventory turnover rate can indicate that the operational process is efficient, while low rates may signal problems with production or sales that can affect profits. Improving inventory turnover requires data analysis to identify items that are taking up too much space and should be reduced or eliminated from the supply chain. It also involves creating an environment where regular stocktaking takes place and anticipating market demand more accurately. By understanding how these elements play into a successful inventory turnover, businesses can develop strategies for improving their bottom line.

What are examples of Inventory Turnover?

Inventory turnover is a measure of how many times the average inventory of a business is sold during a certain period. It’s an important number that can help companies assess their efficiency – or lack thereof! Generally, a higher rate of inventory turnover is better, as it suggests sales are brisk and stock isn’t idle. A lower turnover rate can indicate overstocking, perhaps because it’s taking too long for customers to purchase items.

To calculate inventory turnover, divide cost of goods sold (for the underlying period) by the average value of its inventory during that time. For example, if a company spent $100,000 on goods during a certain timeframe and had purchased an average amount of $60,000 and $40,000 in inventory over the same period, its turnover would be 2($100k/$60k +  $40K).  This gives businesses valuable insights into what products are selling best — and which ones need improvement or discontinuation!

  • Cost of Goods Sold (COGS) = $100,000
  • Beginning Inventory = $60,000
  • Ending Inventory = $40,000

Industry Benchmarks

Interpreting inventory turnover ratio is an important step in determining the success of a business. By understanding the ratio and its industry benchmarks, you can gain insight into your company’s performance as it relates to inventory use and demand.

  • A high turnover ratio suggests strong demand for the products or services offered.
  • A low ratio may mean there is either poor demand or too much overstocking taking place.

Keeping track of these ratios regularly can help you anticipate changes in consumer behavior, recognize any trends that arise, and take proactive measures to improve the balance of supply and demand.

Strategies To Improve  Inventory Turnover

We listed a few strategies for you to improve inventory turnover:

Analyze Your Inventory

It’s important to understand what types of inventory you carry, as well as how much and when items are selling. This will help you identify slow-moving items and excess stock that can be reallocated or sold off.

Utilize Reorder Points

Reorder points are a system that allows you to measure the number of items in your inventory and recognize when it needs to be replenished. This helps minimize overstock and maximize sales potential.

Streamline Your Ordering Process

Take advantage of technology solutions, such as specialized software and automated ordering systems to make sure your orders are placed on time and in the correct quantities.

Improve Your Delivery Times

Look into faster shipping options and better transportation solutions to improve your delivery times and eliminate any unnecessary delays.

Outsource Non-Essential Inventory

Consider outsourcing non-essential inventory items that are taking up storage space and not selling as well as you’d like. This will help reduce inventory costs and create more space for items that are selling well.

Implement Just-in-Time Inventory

Just-in-time inventory is a system where you only order items when they’re needed, rather than storing them in your warehouse or storeroom. This will help keep your inventory levels low and reduce the need for excess storage space.

Track Your Inventory Accurately

Ensure that you’re tracking your inventory accurately by using a reliable system of recordkeeping. This will help you identify what items are selling, when they should be restocked, and how to reallocate any excess inventory.

By implementing these strategies, you’ll be able to create a more efficient inventory management system and improve your inventory turnover rate. With the right approach, you’ll be able to better manage your stock levels and ensure that each item is sold in a timely manner.


In short, inventory turnover is a performance metric that shows how efficiently a company is selling its stock. A higher inventory turnover rate is generally better, as it indicates that the company is quickly selling off its products and doesn’t have too much unsold inventory sitting around. There are a number of factors that can affect your company’s inventory turnover ratio, so it’s important to keep tabs on it and understand what influences it. Ultimately, though, having strong sales and keeping close track of your inventory will help ensure that you have a healthy business with high levels of customer satisfaction.

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