Inventory turnover

What inventory turnover says

Inventory turnover states how often the average stock of an item is sold and replaced within a year. The formula is cost of goods sold divided by average stock value. A figure of four means the stock is completely turned over four times a year, so on paper it sits for three months. The inverse of it is the average days in stock.

The figure is a capital metric. Every item in stock is paid for money that is not available for advertising, staff or new goods. A high turnover means the capital used works fast. A low figure means money is lying on shelves.

Which values are common

The range is wide and depends on the assortment. Fast movers such as consumables reach double digit figures, while furniture or technical equipment sits far lower. Comparing against an industry figure is therefore of little use. Comparison inside your own assortment is telling: items with a similar function should show similar figures, and a clear outlier at the bottom points to a slow seller or a bad forecast.

What a low figure triggers

• Capital tied up: the money sits in stock instead of working. With tight liquidity that is the most important effect.
• Storage cost: every extra space costs rent, heating, staff and administration, regardless of whether the item moves.
• Write downs: the longer an item sits, the greater the risk it will not sell at all or only at a discount.
• Visibility in the shop: slow items with outdated descriptions and old images pull the rest of the assortment down in ranking.

Which levers work

The first lever is the reorder quantity. Anyone buying large volumes for a rebate lowers the purchase price and raises stock value. That calculation is not always wrong, but it should be made deliberately and not out of habit. The second lever is availability in the range: an item that does not sell should not be reordered but phased out and cleared. The third is forecasting. Anyone tracking sales per item over weeks rather than reordering by gut feel lowers the stock level without delivery problems. The fourth is presentation: some slow movers sell notably better after a better description and a fitting photo.

Frequent questions

• Is a high turnover always good? No. Too little stock creates stockouts and lost orders. The art lies in the balance.
• How often to calculate it? Monthly for steering, yearly for judging.
• What counts towards stock value? The cost value of the goods, not the selling price. Otherwise you make yourself look better than you are.