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What is inventory turnover and how should a small retailer interpret it?
Inventory turnover is cost of goods sold divided by average inventory at cost for a period. It shows how many times you sell through and replace your stock. Divide 365 by the result to get days of inventory held.
Example: cost of goods sold of 600,000 and average stock of 100,000 gives a turnover of six, or about 61 days of stock.
It matters because stock is cash waiting on a shelf.
Commonly misread:
- Comparing across product types: groceries and furniture naturally turn at very different speeds.
- Using a single closing stock figure instead of an average.
- Treating higher as always better, as very high turnover can mean frequent stock-outs.
Compare your own figure by category and over time rather than against a generic target.
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