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AccountingPre-Product Market Fit

Inventory Turnover Ratio

Quick Definition

How many times a company sells and replaces its inventory during a period, measuring inventory management efficiency.

What is Inventory Turnover?

Inventory turnover measures how quickly you sell through your stock. Higher turnover means faster-moving inventory, better cash flow, and lower holding costs. Lower turnover suggests overstocking or slow-moving products.

Turnover Benchmarks

Ecommerce: 4-6x annually is typical. Fast-moving consumer goods: 8-12x. Luxury goods: 2-4x. The ideal rate depends on your margins and industry.

Improving Turnover

Reduce slow-moving SKUs, improve demand forecasting, implement just-in-time ordering, run promotions on stagnant inventory, and optimize reorder points.

Formula

Inventory Turnover = Cost of Goods Sold / Average Inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Days Inventory Outstanding = 365 / Inventory Turnover

Example

Ecommerce business annual figures:

  • Cost of Goods Sold: $600,000
  • Beginning Inventory: $150,000
  • Ending Inventory: $100,000

Average Inventory = ($150K + $100K) / 2 = $125,000

Turnover = $600K / $125K = 4.8x per year

Days = 365 / 4.8 = 76 days average to sell inventory

Related

Related Terms

Days Inventory Outstanding (DIO)

The average number of days a company holds inventory before selling it.

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COGS (Cost of Goods Sold)

The direct costs of producing and delivering your product or service, subtracted from revenue to calculate gross profit.

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Gross Profit Margin

The percentage of revenue remaining after subtracting the direct costs of producing goods or services sold.

Learn more

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