53. Inventory Turnover Ratio
Understanding How Quickly You Sell and Replace Inventory
What is Inventory Turnover Ratio?
The inventory turnover ratio measures how many times a business sells and replaces its inventory within a certain period — usually one year.
It helps you understand how efficiently you are managing your stock. A high turnover means strong sales or lean inventory. A low turnover might indicate overstocking, poor sales, or outdated products.
How to Calculate Inventory Turnover Ratio
The most common formula is:
Inventory Turnover Ratio = Cost of Goods Sold divided by Average Inventory
To calculate average inventory, use this:
Average Inventory = (Beginning Inventory + Ending Inventory) divided by 2
Example
Let’s say:
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Cost of Goods Sold (COGS) = €500,000
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Beginning Inventory = €60,000
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Ending Inventory = €40,000
Step 1: Calculate Average Inventory
(60,000 + 40,000) ÷ 2 = €50,000
Step 2: Apply the formula
500,000 ÷ 50,000 = 10
So, your inventory turnover ratio is 10. This means you sold and replaced your inventory ten times during the year.
What Is Days Inventory Outstanding (DIO)?
DIO tells you how many days, on average, you hold inventory before selling it.
To calculate DIO, use this formula:
Days Inventory Outstanding = 365 divided by Inventory Turnover Ratio
From the example above:
365 ÷ 10 = 36.5
So, you hold inventory for about 36.5 days before it is sold.
Why Inventory Turnover Matters
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It affects cash flow: slow inventory ties up money.
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It impacts profitability: holding costs increase over time.
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It reflects customer demand and supply alignment.
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It helps you identify slow-moving products and optimize stock levels.
What’s a Good Turnover Ratio?
It depends on the industry. Here are general guidelines:
A good ratio means your inventory is balanced: not too much, not too little.
How to Improve Your Inventory Turnover Ratio
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Forecast demand more accurately
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Reduce overstocking and excess inventory
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Use Just-in-Time (JIT) inventory strategies
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Promote or discount slow-moving items
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Focus on best-selling products
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Improve supply chain speed to restock faster
Final Summary
The inventory turnover ratio is a simple but powerful number. It shows how fast you move your products — and how well your logistics and sales systems are working together.
A strong turnover ratio means you're selling efficiently, minimizing waste, and keeping your cash flow healthy. Tracking it regularly is essential for any business that holds inventory.
