Calculating Inventory Turnover: Formula & Example

The Inventory Turnover Rate shows how often inventory is completely sold and replenished within a given period. It is one of the most important inventory metrics. This article explains the formula, provides an example, and shows how you can improve this metric.

Key Points at a Glance

• The inventory turnover rate measures how many times inventory is turned over each year.
• Formula: Cost of Goods Sold ÷ Average Inventory.
• A high value indicates low capital tied up and fresh merchandise.
• It can be used to calculate the average Shelf life derive.

What is the inventory turnover rate?

The Inventory Turnover Rate (also known as inventory turnover) indicates how often the average inventory is used up and replenished over a specific period—usually one year. It is a measure of inventory management efficiency: The higher the turnover, the less capital is tied up in inventory.

Calculating Inventory Turnover: The Formula

Inventory Turnover Rate = Cost of Goods Sold ÷ Average Inventory

The average inventory level In simple terms, it is calculated as (beginning inventory + ending inventory) ÷ 2. In some cases, sales revenue is used instead of the cost of goods sold—the important thing is that the numerator and denominator are consistent with each other (both at purchase prices or both at selling prices).

Calculation Example

The annual cost of goods sold is 240.000 €, the average inventory level 40.000 €.

Inventory turnover rate = 240,000 ÷ 40,000 = 6. This means the inventory is turned over six times a year.

Calculate the average holding period

The turnover rate can be used to determine the average storage period Calculate: 360 ÷ turnover rate. In the example, that is 360 ÷ 6 = 60 days. That's the average length of time the merchandise stays in the warehouse.

How can you improve inventory turnover?

• Identifying Slow-Moving Inventory and streamline the product line.
• Reduce inventory through order quantities tailored to demand.
• Optimize Inventory Levels, to avoid excess inventory.
• Boost Sales For slow-moving items.

Instantly See Key Inventory Metrics

Manually updating reorder points, minimum stock levels, and inventory turnover rates takes time and is prone to errors. A digital inventory and warehouse management system such as Inventory ONE records every movement via Barcode/QR Code Scan, automatically calculates the key figures and issues a warning as soon as the reorder point is reached. Learn more on our pages about Warehouse management and Inventory Management Software.

Frequently Asked Questions About Inventory Turnover (FAQ)

What does the inventory turnover ratio indicate?

How often the average inventory is used up and replenished during a given period. A high value indicates low capital tied up in inventory.

How do you calculate inventory turnover?

Cost of goods sold divided by the average inventory. The average inventory is calculated simply as (beginning inventory + ending inventory) ÷ 2.

What is a good inventory turnover rate?

That depends heavily on the industry. As a general rule, the higher the turnover, the better—because less capital is tied up and the goods stay fresher.

How is storage duration related to inventory turnover?

Average holding period = 360 ÷ inventory turnover rate. A higher turnover rate means a shorter holding period.

Additional Inventory Metrics

• Calculate the reported inventory
• Calculate Inventory Turnover Rate (this article)
• Calculate Minimum Inventory