Inventory Turnover
How many times inventory is sold and replaced over a period. Higher usually means healthier cash flow, rather than simply more sales.
In practice
It's usually calculated as cost of goods sold divided by average inventory value over a period - a low number can mean overstocking or slow-moving products, while an unusually high number can sometimes mean a business is stocking out and missing sales.
A business with $200,000 in annual COGS and an average inventory value of $50,000 turns its inventory over 4 times a year.
Why it matters
Comparing turnover against industry norms reveals whether a business is running efficiently or quietly tying up more cash in slow-moving stock than its competitors.
Worth knowing
- Calculated as COGS divided by average inventory value over the same period.
- Benchmarks vary hugely by category - perishables turn over far faster than furniture or electronics.
- Too high a rate can actually signal understocking and missed sales, rather than efficiency.
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