How this number is made
Inventory turnover says how many times the stock is sold and replaced. Days in inventory is 365 divided by that turnover. Use average inventory, not the year-end number alone, if the year-end is a low or high point.
- Cost of goods sold is the cost, not the sales price.
- Average inventory is typically the beginning plus the ending balance, divided by two.
Formula
Turnover = cost of goods sold ÷ average inventory. Days = 365 ÷ turnover.
Worked example
With the figures already in the form, turns per year is 8.00.
Questions
Is a higher turnover always better?
It ties up less cash. It can also mean you stock out. The right number depends on the product.
Why cost and not sales?
Sales include your markup. Inventory is on the books at cost. Mixing them inflates the turnover.