This tool helps businesses understand how quickly inventory is sold and replaced over a given period. It uses Cost of Goods Sold (COGS) and inventory values to calculate turnover ratio and days of inventory on hand.
Example Input
- COGS: $120,000
- Beginning Inventory: $25,000
- Ending Inventory: $35,000
- Period: 365 days
Results
- Average Inventory: $30,000
- Inventory Turnover Ratio: 4.00
- Days of Inventory on Hand: 91.3 days
- Turnover Cycle: 91.3 days
How the calculation works
- Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2
- Turnover Ratio = COGS ÷ Average Inventory
- Days of Inventory on Hand = Period ÷ Turnover Ratio
Why it matters
A higher turnover ratio means stock moves faster, reducing holding costs and risk of obsolescence. A lower ratio may signal overstocking or slow sales. Knowing your turnover cycle helps balance sales demand with inventory investment.
Limitations
- This is an average-based estimate and may not reflect seasonal demand shifts.
- Different industries have different "healthy" turnover ratios.
- It should be used along with sales data and cash flow analysis for better insights.
Frequently Asked Questions
What is a good inventory turnover ratio?
It depends on the industry. Fast-moving goods like food may have a higher ratio, while luxury goods often have a lower ratio.
How often should I check turnover?
Most businesses check monthly or quarterly to monitor efficiency and adjust stock levels.
What does a low turnover ratio mean?
It may indicate overstocking, weak demand, or poor sales. This can increase storage costs and risk of waste.
What does a high turnover ratio mean?
It usually means strong sales or lean inventory. However, it could also signal understocking, leading to missed sales opportunities.
How do days of inventory on hand help?
It shows how long current stock will last if sales continue at the same pace. This helps in planning purchases and avoiding shortages.