Inventory Turnover Analysis
Inventory turnover measures how many times you sell and replace inventory annually. Calculate by dividing cost of goods sold by average inventory. With $500,000 COGS and $100,000 average inventory, turnover is 5 times per year (every 73 days). Higher turnover means efficient inventory management and strong sales relative to stock levels.
Optimal turnover varies by industry - grocery stores turn inventory 15-20 times yearly, furniture retailers 4-6 times, jewelry 1-2 times. Higher turnover reduces holding costs, storage needs, and obsolescence risk but may indicate stockouts. Lower turnover ties up cash and increases carrying costs but might enable bulk purchasing discounts.
Improve turnover by optimizing inventory levels, improving demand forecasting, negotiating faster supplier deliveries, reducing slow-moving items, and boosting sales through marketing. Track turnover by product category to identify problems. Days inventory outstanding shows how long products sit before selling - lower is generally better.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Depends on industry. Grocery: 15-20, restaurants: 12-15, retail clothing: 4-6, furniture: 4-6, jewelry: 1-2. Higher is generally better but compare to industry benchmarks, not across different sectors.
Yes, extremely high turnover might indicate insufficient inventory, leading to stockouts, lost sales, and customer dissatisfaction. Balance between efficiency and availability. Frequent stockouts harm long-term revenue.
Add beginning inventory and ending inventory for the period, then divide by 2. For more accuracy, use monthly inventory levels and calculate the average across all months in the period.