Enter cost of goods sold and your opening and closing inventory. You get turns per year, days of inventory on hand, and the cash tied up in stock at current sell-through.
Both terms must be at cost. Dividing revenue by inventory is the most common version of this calculation and it is wrong, because revenue carries margin and inventory does not. The result inflates turns by exactly the size of your markup.
Turnover is expressed as a count, which makes it awkward. Nobody has an instinct for whether 14 turns is good. Days of inventory on hand is the same measurement inverted, and it is the version worth putting in front of people, because everyone understands what twenty six days of stock means.
In the worked example, average inventory of $18,601 against $21,698 of goods sold across thirty days gives 1.17 turns in the period, 14 turns annualised, and 26 days on hand. If every supplier stopped shipping tomorrow, the shelves empty in under a month.
That framing is what makes the number operational. Twenty six days of stock against a supplier lead time of forty is a business that will run out. The same twenty six days against a lead time of seven is a business carrying more working capital than it needs.
The ratio only means something next to your lead time. On its own it is trivia.
| Category | Typical turns per year | Days on hand |
|---|---|---|
| Fresh grocery | 25 to 50 | 7 to 15 |
| Fast fashion | 8 to 14 | 26 to 46 |
| General ecommerce | 6 to 12 | 30 to 60 |
| Consumer electronics | 6 to 10 | 36 to 60 |
| Furniture and homeware | 3 to 6 | 60 to 120 |
| Jewellery and luxury | 1 to 3 | 120 to 365 |
Low turns are not automatically a problem. A jeweller turning stock twice a year is running the normal version of that business. What matters is whether the number is drifting against your own history and against the terms you buy on.
Inventory is cash that has been converted into objects. In the worked example, $18,802 is sitting on the shelf at the end of the month, against $2,862 of operating profit generated in that month. The stock holding is more than six times the profit it produced.
Every day of inventory added costs $723, because that is what a day of goods sold amounts to at this rate. Extending from 26 days on hand to 40 requires roughly $10,100 of additional cash, and it produces no extra revenue. It is a pure working capital transfer from the bank account to the warehouse.
This is the connection people miss between stock and advertising. A month with strong sales and rising inventory can be profitable and still leave less cash than it started with, which is why a profitable business can fail to fund next month’s ad spend.
Inventory is cash that has been converted into objects. Turnover measures how fast it converts back.
The first trap is averaging two dates. Opening and closing inventory are two snapshots, and if the month contained a large delivery on the twenty ninth, the average is meaningless. Where possible, average across weekly or monthly closes rather than two endpoints.
The second is the blended figure. A single turnover number across a catalogue hides the shape entirely. Fast lines turning thirty times a year and dead stock turning once average out to something respectable, and the respectable number conceals the fact that a fifth of your capital is in product that has not moved since it arrived. Segment by line before drawing any conclusion.
The third is chasing the ratio for its own sake. Turnover improves if you cut stock, and cutting stock improves cash right up to the point where you start running out during a promotion. A stockout during a campaign wastes the ad spend that generated the demand, and that cost never appears in the inventory report.
Read turns alongside your stockout rate. Optimising one without watching the other moves the loss rather than removing it.
COGS. Both terms have to be at cost, and revenue carries your margin. Using revenue inflates turns by the size of your markup and makes the result incomparable with anyone else.
It depends on the category and, more usefully, on your supplier lead time. Twenty six days of stock against a forty day lead time is a business about to run out; the same figure against a seven day lead time is excess working capital.
No. Turnover improves when you cut stock, and cutting too far causes stockouts. A stockout during a campaign wastes the ad spend that created the demand, and that cost never shows up in the inventory report.
Stock is cash converted into objects. A month with rising inventory can show a profit and still leave the bank balance lower, because the money went into the warehouse rather than out as cost.