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What is inventory turnover?
inventory management

What is inventory turnover? Meaning, Formula & Benchmarks

If your business sells products, managing your inventory effectively is crucial to maintaining appropriate stock levels, understanding sales trends, optimising order fulfilment, and keeping storage costs in check. Inventory turnover is an essential inventory metric for understanding how well your business manages inventory, which can impact everything from your customer experience to your bottom line.


Your inventory turnover is the rate at which your products are sold during any given month, quarter or year. By knowing this metric, you can better determine when it’s time to order new items and understand the way products move through your business.


In this article we will discuss what inventory turnover means, its benefits and provide formulas and examples to help you benchmark your inventory turnover.


Here’s inventory turnover explained.

What is inventory turnover?

Inventory turnover is a measure of how often inventory is sold or used, and replaced over a particular accounting period such as a month, quarter or year. Essentially, it is the rate at which you need to replace your inventory. Inventory turnover is often referred to as stock turnover.


For example, an annual inventory turnover ratio of 2 indicates that you sold twice the amount of inventory you stored during that year.


Inventory can be considered ‘turned over’ if it’s sold to customers or removed from sellable stock for any other reason, such as spoilage, damage, or theft.



What can inventory turnover tell you?

Tracking inventory turnover can help you uncover inventory trends, sales trends and customer needs by identifying the best-performing and worst-performing products in your business. Having an insight into inventory performance allows business owners to make informed decisions about purchasing stock, pricing products, manufacturing, marketing, budgeting and forecasting.

When looking at what stock turnover indicates about your business performance, it’s important to understand your business model, pricing strategy, marketing efforts and the types of products you sell.

High inventory turnover ratio

As a general rule of thumb, a high inventory turnover ratio is good because it means inventory is being sold quickly. A high inventory turnover can indicate that:

  • Sales are strong
  • There is a healthy demand for your products
  • Stock levels are optimal
  • Cash isn’t unnecessarily tied up in holding inventory

Maintaining a high inventory turnover ratio (i.e. selling stock quickly) also reduces the risk of products being unsellable due to spoilage or becoming obsolete.


That said, in some cases, a high inventory ratio can indicate:


  • There is not enough stock on hand, which could signal supply chain issues
  • Lost sales due to low stock
  • Poor customer experience
  • Issues with forecasting

Low inventory turnover ratio

On the flipside, a low inventory turnover ratio could indicate:


  • Weak sales
  • Overstocking
  • Ineffective marketing strategies
  • Inappropriate pricing

Low inventory turnover is usually not ideal because products can deteriorate the longer they’re stored while incurring carrying costs or holding costs at the same time. Excess inventory also ties up cash, which can have a negative impact on your cash flow.


However, there are exceptions to this. For instance, low inventory turnover might not be a big cause for concern if it’s cheaper to order popular stock in bulk, or your business tends to have seasonal dips throughout the year.



How to determine inventory turnover ratio

There are three steps involved in determining your inventory turnover ratio:

Get your cost of goods sold (COGS) from your chart of accounts or find out how to manually calculate your COGS.

Calculate your average inventory value by combining your beginning inventory and ending inventory balances for a given time period, then divide that figure by two.

Divide your COGS by your average inventory.

Inventory turnover formula

The inventory turnover ratio = cost of goods sold ÷ average inventory.

Cost of Goods Sold (COGS)

Inventory turnover ratio = _______________________

Average Inventory


Applying the formula: inventory turnover example

Using the formula and steps above let’s look at an inventory turnover example.

1. Let’s say a business’s cost of goods sold over a year is $100,000.

2. The inventory value at the beginning of the year is $30,000 and the inventory value at the end of the year is $20,000. Now we need to calculate the average inventory value:

30,000 + 20,000 ÷ 2 = 25,000

3. From there, we can calculate the inventory turnover ratio:

100,000 ÷ 25,000 = 4

Inventory turnover calculator

QuickBooks' inventory turnover calculator can be used to calculate the ratio of inventory turnover. This ultimately gives you a measure of your company's success in converting inventory to sales.

There are four main values you must enter into the calculator:

  • Input the cost of goods sold - multiply the cost of goods produced by the number of units sold in the preceding accounting period. You can also use the QuickBooks COGS calculator to determine this value.
  • Enter the beginning inventory value for the selected accounting period.
  • Input the ending inventory value at the end of the preceding accounting period.
  • Lastly, input the number of days in your financial year.

Based on the above inputs, the QuickBooks inventory turnover calculator will give you the ratio of inventory turnover in seconds. Our calculator is simple, and self-explanatory – giving you accurate calculations effortlessly. This valuable online tool is guaranteed to save you time and effort, which is something every business needs.

Grow Your Business with QuickBooks

Streamline inventory management for your business

Whether you want to know your inventory turnover ratio or manage your stock levels, inventory tracking can be time-consuming.

With QuickBooks Online inventory management software, you always know what’s selling and what you need to order. On top of that, your balance sheet is automatically adjusted as your stock values change, so your financials are always up to date.

Find out more about QuickBooks inventory management software and start a free 30-day trial today.

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