Inventory turnover

The formula

• T = COGS / L

COGS is the cost of goods sold over a year and L the average inventory during it, both at cost. The result is how many times the stock was sold and bought again.

A worked example

Cost of goods sold of 900,000 over a year with an average inventory of 150,000: T = 900,000 / 150,000 = 6 times a year, so the stock turns over about every two months. Turned round, a shop that sells 900,000 at cost and wants to turn its stock 12 times keeps an average of 75,000 on the shelf.

Turnover and days

Days inventory outstanding is the same measure counted the other way: DIO = 365 / T. A turnover of 6 is 61 days of stock. The multiple is the convention in retail and the days in finance; they carry the same information.

Why cost, not sales

Inventory is carried at what it cost. Dividing sales at the selling price by stock at cost mixes two prices and overstates the turnover by the mark-up. Some trade figures do use sales; a comparison has to know which.

Common mistakes

• Using the closing stock instead of the average. A year-end stock run down for the count gives a turnover that is too high.
• Dividing by revenue. The mark-up inflates the result.
• Comparing a bakery with a furniture shop. Perishable goods turn in days, furniture in months.

Frequently asked questions