Two products can hold the same value on the shelf and behave in opposite ways. One is bought and used every few weeks. The other was bought once, a year ago, and most of it is still there. Inventory turnover is the number that tells them apart.
It measures how many times a year you use up and replace your stock. A high turnover means stock moves quickly and the money in it comes back soon. A low turnover means capital sitting on a shelf.
The formula
Turnover is usually calculated on value, for the business as a whole or for a group of products:
Cost of goods sold is what the goods that left stock had cost you, not what you sold them for. Average inventory is the value you held on a typical day, often estimated as the value at the start and the end of the period divided by two.
Take a year with a cost of goods sold of €240,000 and stock worth €50,000 in January and €70,000 in December. The average inventory is €60,000, and turnover is 240,000 ÷ 60,000 = 4. Stock was used up and replaced four times in the year.
The same idea works per product, in units:
A product that uses 1,200 units a year with 300 on the shelf turns 4 times. One that uses 1,200 a year with 50 on the shelf turns 24 times.
Days of inventory
Turnover is easier to feel as time. Days of inventory is how long the stock you hold will last at the current rate of use:
| Turnover | Days of inventory | What it means |
|---|---|---|
| 12 | 30 | About a month of stock on hand |
| 6 | 61 | Two months |
| 4 | 91 | A quarter |
| 2 | 183 | Half a year |
| 1 | 365 | A full year of stock sitting on the shelf |
A turnover of 4 and 91 days of inventory are the same fact. Days are often the better number to show a colleague, because they map straight onto a question: do we need two months of this on the shelf.
What a good number looks like
There is no single right turnover. A distributor of fast-moving consumables might turn 10 or 12 times a year. A workshop holding spare parts for machines it services might be happy with 2, because the cost of not having the part is far higher than the cost of holding it.
Three comparisons are more useful than a target:
- Against the product’s lead time. If a supplier delivers in 10 days and you hold 120 days of a product, you are holding far more than the delivery risk justifies.
- Against last year. A product whose turnover falls from 6 to 3 has either lost demand or been over-ordered. Both deserve a look.
- Against the other products from the same supplier. When one product turns 8 times and its neighbours turn twice, the order quantities on the neighbours are probably copied from the fast one.
Why turnover drops
A falling turnover rarely means the product stopped selling overnight. The usual causes are quieter:
- An order quantity set once and never revisited, while demand slowly fell.
- A bulk purchase for a discount that will take two years to use.
- A new variant that took over the demand, with the old one still being reordered.
- A reorder point set from a month that included a one-off large job.
The fix is almost always on the next purchase order, not on the shelf. Reduce the quantity, or stop reordering until stock comes down, rather than trying to push the slow product out.
Two things turnover does not tell you
It does not say whether stock is old. A product can turn 4 times a year on average while 10 units of it have been sitting untouched for 18 months, hidden behind recent deliveries. An ageing report, which looks at when each batch arrived, catches that. Turnover does not.
It does not count stock that moved between your own locations. Moving 200 units from the warehouse to the shop is not use. If your figures include transfers, turnover looks healthier than it is.
How StockBold measures it
The product turnover report in StockBold gives each product a monthly usage, a turnover and a days of inventory figure for the period you choose. Usage counts stock-outs and components consumed in assemblies. Transfers between locations are never counted. Turnover is the annual usage divided by the stock you hold today, and days of inventory is the same figure the other way round.
Each product falls into one of four bands with fixed thresholds. Fast means 6 or more turns a year, or fewer than 30 days of stock. Medium means 2 or more turns, or fewer than 90 days. Slow is everything below that which still moves. Dead means no usage in the period, or no stock left to turn. Click a product to see the inputs and the arithmetic behind its figure.
For the value-based figure, the cost of goods sold report costs every stock-out at what your costing method takes out of stock, and the inventory valuation report gives the stock value on any date you pick.
Read more about stock valuation and reports, or the help guide on the product turnover report.