Inventory turnover tells you how often you sell and replace your inventory each year. High turnover means efficient capital use; low turnover means cash trapped in unsold goods. Here's the math, the benchmarks, and how to improve.
The formula
Inventory turnover = COGS / Average inventory
Express in turns per year.
Worked example: COGS $500k, average inventory $50k. Turnover = 10. Replace inventory 10× per year.
Days inventory on hand
Inverse: 365 / turnover = days of inventory.
10 turns = 36.5 days on hand. Inventory replaced every 5 weeks.
Some businesses think in days; others in turns. Same metric.
Industry-typical turnover
| Industry | Typical turnover | Days on hand |
|---|---|---|
| Grocery | 15–25 | 15–25 |
| Apparel | 4–6 | 60–90 |
| Furniture | 4–6 | 60–90 |
| Auto dealers | 8–12 | 30–45 |
| Books / media | 3–5 | 70–120 |
| Wholesale electronics | 5–8 | 45–75 |
| Manufacturing | 4–8 | 45–90 |
| Restaurants | 20–40 | 10–20 |
| Software (no physical inventory) | N/A | N/A |
Your industry's typical turnover sets the benchmark.
Why high turnover is good
- Less cash tied up in inventory.
- Faster cash recovery from sales.
- Less risk of obsolescence.
- Less storage cost.
- More responsive to demand changes.
Why turnover can be too high
- Stockouts: running out of products causes lost sales.
- Frequent reordering: ordering costs (shipping, paperwork) add up.
- Less negotiating power: small orders don't qualify for volume discounts.
- Customer experience: "out of stock" hurts brand.
Optimal turnover balances these against the benefits of holding less.
Why turnover can be too low
- Capital tied up: $200k of inventory at low turnover is dead money.
- Storage costs: warehouse rent, insurance, security.
- Obsolescence: tech and fashion lose value fast.
- Spoilage: food, perishables.
- Markdown risk: aging inventory often sells at lower prices.
How to improve turnover
1. Better demand forecasting. Order what you'll actually sell, not what you might.
- Track historical sales by SKU and season.
- Use forecasting software (or spreadsheets) for seasonal businesses.
- Watch leading indicators (search trends, competitor activity).
2. Just-in-Time ordering. Order when needed, not in advance.
- Requires reliable suppliers with short lead times.
- Risks: stockouts if supplier delays.
- Toyota popularized this approach in manufacturing.
3. Vendor-managed inventory (VMI). Supplier owns inventory until consumed. You only pay when used.
- Common in B2B: cleaning supplies, office supplies.
- Reduces your inventory cost.
- Vendor takes the risk.
4. Better SKU management. The 80/20 rule: 20% of SKUs generate 80% of revenue. Manage inventory accordingly.
- Heavy stock for top sellers.
- Lean stock for slow movers.
- Consider discontinuing bottom 10–20% of SKUs.
5. Better promotions and clearance. Clear slow-moving inventory faster.
- Markdown schedule: drop price 25%, then 50%, then 75% over 8 weeks.
- Bundle slow-movers with fast-movers.
- Donate or write off truly stuck inventory rather than carrying for years.
6. Drop-shipping. Don't carry inventory at all — supplier ships directly to customer.
- Common in e-commerce.
- Lower margin but zero inventory holding cost.
- Harder to control quality and shipping speed.
Inventory turnover by category
Within a single business, turnover varies by category. Track separately:
- A items: high-volume, high-margin. Aim for high turnover (managed tightly).
- B items: medium-volume, medium-margin. Standard inventory management.
- C items: low-volume, low-margin. Tight stock; consider drop-shipping.
The 80/20 rule: 20% of items drive 80% of sales. Manage them differently.
Days inventory + days receivable + days payable
Cash conversion cycle:
CCC = Days Inventory + Days Receivable − Days Payable.
The shorter the cycle, the less working capital you need. Many e-commerce companies pay suppliers weeks after collecting from customers — negative CCC. They're paid before they pay.
Common inventory mistakes
1. Overordering "just in case." Inventory sitting unsold is opportunity cost.
2. Bulk discounts that aren't really. 10% volume discount on slow-moving inventory might not pay for itself in carrying costs.
3. Not tracking by SKU. Aggregate turnover hides bad SKUs and good SKUs in average.
4. Ignoring seasonal patterns. Q4 inventory needs are 2–3× higher than other quarters in many businesses.
5. Carrying obsolete stock for emotional reasons. "We might sell this someday." Probably not. Mark it down or write it off.
Specific inventory metrics
Stockout rate: % of orders unfulfilled. Should be under 1%.
Carrying cost: 20–30% of inventory value per year (storage, insurance, capital cost, obsolescence).
Order fill rate: % of complete orders shipped on time. Above 95% is good.
Inventory accuracy: physical count vs system count. Should be 95%+. Below 90% indicates poor inventory management.
Calculate your turnover
Our inventory turnover calculator takes COGS and average inventory and returns turnover and days on hand. Use to benchmark against industry or track changes over time.