inventory turnover
Think of a fishmonger versus a furniture shop. The fishmonger empties and refills his display many times a week — fish that sits goes bad. The furniture shop might sell its entire stock just a few times a year. Inventory turnover is a single number that captures how many times, over a period, a business sells through and replaces its stock.
Inventory turnover = cost of goods sold ÷ average inventory, where average inventory is usually (beginning + ending) ÷ 2. If cost of goods sold for the year was 600,000 and average inventory was 100,000, turnover is 6 — the shop cycled through its inventory six times. A related figure, days' sales in inventory, converts this to time: 365 ÷ turnover, so a turnover of 6 means goods sit about 61 days on average before selling. Higher turnover generally means inventory is moving briskly; lower turnover means goods are lingering.
It matters because it links the balance sheet to actual selling activity and flags problems: a falling turnover can mean overstocking, slowing demand, or obsolete goods piling up, while a very high turnover can warn of frequent stockouts and lost sales. The big caveat is that 'good' turnover is wildly industry-specific — comparing a grocery chain's turnover to a jewelry store's is meaningless. Turnover should be judged against the same business over time and against close competitors, not in the abstract.
A supermarket has cost of goods sold of 600,000 and average inventory of 100,000, so turnover = 600,000 ÷ 100,000 = 6 times a year. Days in inventory = 365 ÷ 6 ≈ 61 days. A nearby jeweller might turn over only 1.5 times — perfectly normal for that trade.
Cost of goods sold ÷ average inventory; what counts as 'good' depends entirely on the industry.
Use cost of goods sold (not sales) in the numerator to match the cost basis of inventory, and never compare turnover across very different industries — a healthy figure for groceries would be alarming for jewelry.