How inventory turnover is worked out
Average the beginning and ending inventory, then divide the cost of goods sold by that average. Dividing the days in the period by the turnover gives the days sales in inventory.
Turnover = COGS ÷ average inventory Days sales in inventory = days ÷ turnover
Average inventory = (beginning + ending) ÷ 2. Nothing is rounded until the result is shown.
Example: one year
Cost of goods sold $600,000.00; inventory $90,000.00 at the start and $110,000.00 at the end; 365 days.
- Average inventory: ($90,000.00 + $110,000.00) ÷ 2 = $100,000.00
- Turnover: $600,000.00 ÷ $100,000.00 = 6 times
- Days sales in inventory: 365 ÷ 6 = 60.83 days
Questions
What does the turnover ratio tell me?
How many times the stock was sold and replaced in the period. A turnover of 6 means the average inventory was used up six times.
What are days sales in inventory?
The average number of days stock sat before it was sold: the period length divided by the turnover. It is the same information as turnover, expressed in days.
Why cost of goods sold and not sales?
Inventory is valued at cost, so the numerator is also at cost. Using sales would mix cost and price. COGS for a year is beginning inventory plus purchases minus ending inventory [1].
Why average inventory?
Stock changes through the period, so one snapshot can mislead. This page averages the beginning and ending figures. If you have monthly counts, average those and enter the result as the average.
What if the period is not a year?
Change the period length. Turnover covers only that period, so a quarter’s turnover is not comparable with a year’s.
Is a high turnover good?
This page gives no benchmark. A very high figure can mean stock-outs and a very low one slow stock; what is normal depends on the goods you sell.