Calculate your inventory turnover ratio and days sales of inventory. Analyze how efficiently you're managing stock and identify opportunities to optimize inventory levels.
Total cost of products sold during the year
Inventory value at the start of the period
Inventory value at the end of the period
Inventory turnover ratio measures how many times a company sells and replaces its inventory during a specific period, typically a year. It's a critical metric for understanding inventory efficiency and working capital management. A higher turnover ratio generally indicates strong sales and efficient inventory management, while a lower ratio may suggest overstocking, obsolescence, or weak sales.
The ratio is calculated by dividing the cost of goods sold (COGS) by average inventory. For example, if your COGS is $500,000 and average inventory is $100,000, your turnover ratio is 5, meaning you sold and replaced your entire inventory 5 times during the year. This metric helps businesses optimize stock levels, improve cash flow, and reduce storage costs while ensuring adequate inventory to meet customer demand.
Inventory Turnover = Cost of Goods Sold (COGS) ÷ Average Inventory
Where Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2
DSI = 365 Days ÷ Inventory Turnover Ratio
Also known as Days Inventory Outstanding (DIO) or Average Days to Sell Inventory
Direct costs of producing or purchasing the products you sold during the period. Includes materials, labor, and manufacturing overhead. Found on your income statement.
The mean value of inventory during the period. Using average instead of ending inventory provides a more accurate picture, especially for businesses with seasonal fluctuations.
Optimal inventory turnover varies significantly by industry. Compare your ratio to industry standards to assess performance. Higher isn't always better—extremely high turnover may indicate stockouts and lost sales.
| Industry | Typical Turnover Ratio | Days Sales of Inventory | Characteristics |
|---|---|---|---|
| Grocery Stores | 15-20x | 18-24 days | Perishable goods require rapid turnover |
| Restaurants | 12-18x | 20-30 days | Fresh ingredients, high turnover needed |
| Apparel Retail | 4-6x | 60-90 days | Seasonal collections, fashion cycles |
| Electronics Retail | 6-8x | 45-60 days | Fast product cycles, technology changes |
| Furniture Stores | 3-5x | 73-120 days | Large items, longer sales cycles |
| Auto Parts | 4-6x | 60-90 days | Wide variety, predictable demand |
| Jewelry | 1-2x | 180-365 days | High value, luxury items, slow turnover |
| Manufacturing | 5-10x | 36-73 days | Varies by production cycle and materials |
| Wholesale Distribution | 6-12x | 30-60 days | Volume business, efficient logistics |
| Pharmaceutical | 3-4x | 90-120 days | Regulatory requirements, shelf life concerns |
Generally positive, indicating strong sales and efficient inventory management. However, extremely high ratios may signal problems.
Positive Indicators:
Potential Concerns:
Often indicates problems with inventory management, sales, or purchasing. Requires investigation and corrective action to improve efficiency.
Common Causes:
Negative Impacts:
Use data-driven approaches to maintain optimal stock levels that balance availability with efficiency.
Better predictions lead to more accurate inventory levels and reduced excess stock.
Increase turnover by moving inventory faster through strategic sales and marketing initiatives.
Minimize dead stock that ties up capital and reduces overall turnover ratio.
Better supplier terms and reliability enable more efficient inventory management.
Calculate turnover for different product lines or categories separately. This reveals which products perform well and which need attention. Focus improvement efforts on low-turnover categories that represent significant inventory value.
Track your ratio monthly or quarterly to identify trends. Declining turnover may signal problems before they become critical. Compare current performance to historical data and seasonal patterns to understand whether changes are normal or concerning.
Don't sacrifice customer satisfaction for higher turnover. Maintain adequate stock of popular items to avoid stockouts. The goal is optimal turnover that maximizes profitability while meeting customer demand, not the highest possible ratio.
Implement inventory management software with real-time tracking, automated reordering, and analytics. Barcode or RFID systems provide accurate inventory counts and reduce manual errors. Better data leads to better decisions and improved turnover.
Inventory turnover is one component of the cash conversion cycle. Also monitor days sales outstanding (DSO) and days payable outstanding (DPO). Optimizing all three metrics together maximizes working capital efficiency and cash flow.
Annual COGS: $2,400,000
Beginning Inventory: $120,000 | Ending Inventory: $140,000
Average Inventory: ($120,000 + $140,000) ÷ 2 = $130,000
Inventory Turnover: $2,400,000 ÷ $130,000 = 18.5x
Days Sales of Inventory: 365 ÷ 18.5 = 19.7 days
Excellent turnover for grocery; perishable goods move quickly with minimal waste
Annual COGS: $300,000
Beginning Inventory: $80,000 | Ending Inventory: $60,000
Average Inventory: ($80,000 + $60,000) ÷ 2 = $70,000
Inventory Turnover: $300,000 ÷ $70,000 = 4.3x
Days Sales of Inventory: 365 ÷ 4.3 = 85 days
Good turnover for apparel; seasonal collections turn over about once per season
Annual COGS: $1,200,000
Beginning Inventory: $500,000 | Ending Inventory: $600,000
Average Inventory: ($500,000 + $600,000) ÷ 2 = $550,000
Inventory Turnover: $1,200,000 ÷ $550,000 = 2.2x
Days Sales of Inventory: 365 ÷ 2.2 = 166 days
Low turnover for electronics; likely overstocked with slow-moving or obsolete items. Should target 6-8x turnover.
Annual COGS: $5,000,000
Beginning Inventory: $900,000 | Ending Inventory: $1,100,000
Average Inventory: ($900,000 + $1,100,000) ÷ 2 = $1,000,000
Inventory Turnover: $5,000,000 ÷ $1,000,000 = 5x
Days Sales of Inventory: 365 ÷ 5 = 73 days
Solid turnover for auto parts; balances availability of thousands of SKUs with efficient capital use
Calculate gross and net profit margins
Calculate markup percentage
Calculate break even point
Calculate sales commission
Calculate salary and take-home pay
Convert hourly to annual salary