What is Inventory Turnover?

For most online stores, stock is the biggest place cash goes to sit still. Every product on the shelf was paid for before it sold, and until it sells, that money can't fund ads, new products or anything else.

Inventory turnover tells you how quickly that stock turns back into sales. Low turnover means cash sitting on shelves; very high turnover can mean you are running out of things customers want to buy. Both are worth knowing about.

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What Is Inventory Turnover?

Inventory turnover is cost of goods sold divided by average inventory value over the same period. It shows how many times you sell through your average stock - and how efficiently stock becomes sales.

It is also called stock turnover or inventory turns. Flip it around and you get days of inventory - roughly how many days your current stock would last at the current rate of sales.

🧒 Explained simply Your corner shop keeps about $100 worth of sweets on the shelf. Over a year you sell sweets that cost you $600. That means you emptied and refilled the shelf about six times. A shop that only refills its shelf twice a year has the same money tied up in sweets but sells far fewer of them - and some of those sweets are getting old.

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How to Calculate Inventory Turnover

Inventory Turnover = COGS ÷ Average inventory value

Average inventory value is usually the stock value at the start of the period plus the value at the end, divided by two. Value inventory at cost, not at retail price.

Say a store has, for one year (illustrative round numbers):

• Cost of goods sold: $240,000
• Inventory value at the start of the year: $70,000
• Inventory value at the end of the year: $50,000

Average inventory = ($70,000 + $50,000) ÷ 2 = $60,000

Inventory turnover = $240,000 ÷ $60,000 = 4 times a year

Days of inventory = 365 ÷ 4 = about 91 days

A few notes on getting it right:

• Match the period. Days of inventory = 365 ÷ turnover only works when turnover is calculated for a full year. For a quarter, use the number of days in the quarter instead.
• Use more snapshots for seasonal stores. If stock swings a lot through the year, average month-end inventory values rather than just the start and end.
• Keep both sides at cost. Dividing sales at retail price by inventory valued at cost inflates turnover and makes stock look healthier than it is.

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Why Inventory Turnover Matters

Inventory is cash in another form. A store with $60,000 of stock turning four times a year has the same cash tied up as one turning twice a year, but sells twice as much from it. Raising turnover frees cash without needing more sales.

Slow stock also costs money on its own. It takes up storage, ages, goes out of season and eventually gets marked down - which pushes up discount rate and pulls down gross margin.

At the other end, turnover that is very high for a product can mean frequent stockouts. Every day a best-seller is out of stock is lost sales and customers who may try another store. The aim is not the highest possible number, but the right one for each product.

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What Is a Good Inventory Turnover?

It depends on the category. Fresh and fast-moving goods turn far more often than furniture or jewellery, and a store selling both will see very different numbers for each. Comparing your turnover with a store in a different category says little.

Compare products and seasons within your own store instead. Calculate turnover per product or category, because fast sellers hide dead stock in the store-wide figure, and compare each season with the same season last year.

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How to Improve Inventory Turnover

1. Calculate it per product and category

The store-wide number averages your best-sellers with your slowest lines. Rank products by turnover and look at the bottom of the list - that is where the cash is stuck.

2. Clear dead stock deliberately

For products that have barely moved in months, decide what to do: bundle them with best-sellers, run a targeted promotion, sell them through another channel or write them off. Holding them rarely improves things.

3. Reorder from sales data, not habit

Use units sold per product and month to set reorder quantities. Ordering smaller amounts more often, where suppliers allow it, keeps average stock lower without running out.

4. Plan around seasons

Buy for the season with last year's sales by month in front of you, and plan markdowns for seasonal lines before the season ends rather than after.

5. Cut the long tail of variants

Sizes, colours and variants that rarely sell still need stock. Trimming slow variants lowers inventory value while keeping most of the sales.

6. Watch for stockouts on fast sellers

Improving turnover by under-stocking best-sellers just moves the problem. Keep enough safety stock on the products that drive most sales.

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How to Track Inventory Turnover

Chartsy for Ecommerce connects to your BigCommerce store with read-only access and syncs orders, products and customers every hour. It reports units sold by product, SKU and month, and cost of goods sold by product and month where cost prices are recorded in your store. If cost prices are missing, Chartsy can't fill them in.

Stock levels and inventory value come from your store's inventory records. Combine them with Chartsy's cost of goods sold to calculate turnover per product or category.

Order-based views worth checking:

• "Show units sold by product for the last 12 months"
• "Show cost of goods sold by category by month this year"
• "Which products sold the fewest units last quarter?"

Try Chartsy for Ecommerce free for 14 days →

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