Inventory turnover formula
Inventory turnover — often called "inventory turns" — is the number of times per year you sell through your average inventory. The formula is Turns = COGS / Average Inventory. If you did $500,000 in cost of goods sold last year and your average inventory balance was $100,000, you turned inventory five times — every 73 days on average.
Turns is the single most important operational metric for retail, ecommerce, and distribution businesses. Faster turns mean less capital tied up, fresher product, less markdown risk, and better cash flow. Slower turns mean dead stock, storage cost, and products that may not sell at full price.
Days of inventory — the other way to see it
Days of inventory is 365 / Turns. A five-turn business holds about 73 days of inventory. A fifteen-turn grocery store holds about 24 days. The more perishable or seasonal the product, the fewer days you want to hold. Fashion runs 4–6 turns because trends shift quickly; electronics runs 6–10 turns because new models replace old ones; groceries run 14–20 turns because food spoils.
Industry benchmarks
- Grocery / supermarket: 14–20 turns.
- Apparel / fashion: 4–6 turns.
- Electronics: 6–10 turns.
- Furniture: 2–4 turns.
- Auto parts retail: 4–6 turns.
- Hardware stores: 3–5 turns.
- Jewelry: 1–2 turns.
- Ecommerce DTC (consumables): 8–12 turns.
- Ecommerce DTC (durable goods): 4–8 turns.
Compare your turns number to your industry. Running well below the range means cash is tied up in stock; running well above could mean you are stocking out and losing sales.
Reorder points and safety stock
The reorder point is the inventory level at which you place a new order from your supplier. The formula is Average Daily Usage × Lead Time + Safety Stock. If you sell $1,500 per day of a product at cost and your supplier takes 14 days to deliver, you need to reorder when you have $21,000 left plus some safety margin. The calculator above shows the core reorder level; add 20–30% safety stock to cover demand spikes and supply delays.
Why slow turns are expensive
Slow-moving inventory is expensive in three ways. First, it ties up cash that could be earning a return elsewhere — typically 15–25% opportunity cost. Second, it costs storage: warehouse rent, shrinkage, handling, and insurance typically add 20–30% per year to the cost of inventory held beyond a reasonable turn rate. Third, slow items are discount risk — the longer it sits, the higher the chance you mark it down to move it.
If you have inventory that has not turned in 12 months, it is almost certainly worth discounting heavily (30–50% off) to convert it to cash. Accountants call this "carrying cost" and most small businesses underestimate it by at least half. Our cash flow calculator helps you see the impact on bank balance.
Inventory velocity vs profitability tradeoff
Higher turnover does not always mean higher profit. You can increase turns by stocking less, but that risks stockouts and lost sales. You can increase turns by cutting prices, but that hurts margin. The right target is "highest turns at full margin" — push turns up without discounting, through better forecasting and more disciplined SKU management.
SKU-level analysis beats aggregate
Whole-business inventory turns can mask huge variation at the SKU level. Most businesses follow a Pareto rule: 20% of SKUs drive 80% of turns. The other 80% of SKUs often turn only 1–2 times per year and eat carrying cost disproportionately. Run turns by SKU at least quarterly and consider dropping or consolidating the bottom quartile.
Seasonality and turns
Seasonal businesses need seasonal reorder points. A pool-supply store reorders chlorine heavily in March–May and minimally in November. If you apply a flat reorder point year-round, you will either stock out in peak or carry dead stock in off-season. The simplest way to handle this: recalculate reorder points once per quarter using the trailing 90-day usage rate, not the annual average.
Just-in-time vs safety stock
Just-in-time inventory — holding minimal stock and relying on fast supplier turnaround — minimizes capital tied up but creates risk when supply chains hiccup. Post-2020 most businesses have moved back toward holding more safety stock. A reasonable middle ground: hold enough safety stock to cover 120–150% of lead time, not 500%.
Tools that make this easier
Shopify, Square, Lightspeed, and most inventory-management platforms track turns natively. If you are running on spreadsheets, pull COGS from your P&L and calculate average inventory as the average of your beginning and ending balance for the period. Pair this calculator with the pricing calculator to decide when to lift prices on fast movers versus discount slow movers.