How to use the inventory turnover calculator
- Enter the cost of goods sold for the period, at cost, not at selling price.
- Enter your beginning and ending inventory at cost. The calculator averages the two.
- Set the days in the period. Use 365 for a year, 90 for a quarter or 30 for a month.
- Read the turnover ratio and the days sales of inventory. If your period is not a year, the turnover scaled to 365 days is shown too.
Formula
Average inventory = (beginning inventory + ending inventory) / 2
Inventory turnover = cost of goods sold / average inventory
Days sales of inventory = days in the period / turnover
Turnover scaled to 365 days = turnover x 365 / days in the period
Days sales of inventory equals days x average inventory / cost of goods sold. It estimates how many days it takes to sell the stock you hold.
Worked example
A shop has cost of goods sold of $480,000 for the year. Inventory was $90,000 at the start and $110,000 at the end, so average inventory is $100,000.
Turnover is 480,000 / 100,000 = 4.8 times. Days sales of inventory is 365 / 4.8 = about 76 days, so on average stock is held for about two and a half months before it sells.
Reading the ratio
A higher turnover means the stock you hold is selling through faster relative to its size. A lower one means it sits longer. Neither is automatically good or bad. A grocer and a furniture store sell very different things on very different schedules, and a high turnover can also be a sign of running short of items customers want. The most useful comparison is against your own earlier periods for the same products.
Why days sales of inventory helps
The number of days is easier to picture than a ratio. If turnover is 4.8 times, stock lasts about 76 days. If that is much longer than your supplier lead time, you may be tying up cash. The reorder point calculator and EOQ calculator help you set order timing and size once you decide what you want to change.
Choosing the inputs
Use cost of goods sold and inventory on the same basis, usually at cost. If your inventory swings sharply during the period, an average of just two points can mislead, and averaging monthly balances is more reliable. Your profit margin calculator shows what each sale earns on top of that cost.
Assumptions and limits
- Cost of goods sold and inventory are both measured at cost over the same period.
- Average inventory is the simple average of the beginning and ending balances.
- The days in the period are whatever you enter. The scaled figure to 365 days is simple proportion.
- No benchmark is applied, because a healthy ratio depends on the kind of product and business.
Frequently asked questions
Why can I not enter zero for both inventory values?
Turnover divides by the average inventory, and an average of zero would make the result meaningless. Enter at least one balance above zero.
Should I use sales instead of cost of goods sold?
Use cost of goods sold. Sales include your markup, which inflates the ratio, while inventory is recorded at cost.
What does scaled to 365 days mean?
If you enter a quarter, the turns for that quarter are multiplied by 365 and divided by the days you entered, giving a yearly equivalent. It assumes the quarter represents the year.
Is a low turnover always bad?
No. Slow selling items such as furniture can have a low ratio and still be profitable, and a business might hold extra stock on purpose before a busy season.