Guide
The inventory turnover ratio
Turnover measures how many times a year your stock sells through. It is the closest thing inventory has to a single headline number — which is exactly why it is so often misread.
The formula
Turnover of 6 means you sold through your average stockholding six times over the year — about 61 days of stock on hand. The calculator is here.
Averaging opening and closing is a crude smoothing. If your stock swings seasonally, average the twelve month-end figures instead; a business whose year-end deliberately lands at a low point will otherwise flatter itself considerably.
Cost, not revenue — the error that makes everyone look good
The most common mistake is dividing sales by average inventory. Inventory is carried at cost. Putting revenue on top inflates the ratio by your entire gross margin.
That business would believe it holds 37 days of stock when it holds 61. If you are comparing yourself with a published benchmark, make sure the benchmark uses the same basis — many trade publications quietly do not.
Days of supply is the number to quote
"We turn 6 times" requires mental arithmetic to be meaningful. "We hold 61 days of stock" is immediately legible to anyone in the room, including people who do not think about inventory for a living. It also maps directly onto the operational questions — is 61 days reasonable given a 7-day lead time? — in a way the ratio does not.
Use turnover for comparisons and trends; use days of supply for decisions and conversations.
Benchmarks by sector
| Sector | Typical annual turnover | Days of supply |
|---|---|---|
| Grocery and fresh food | 12–25× | 15–30 |
| Restaurants and food service | 20–40× | 9–18 |
| General retail | 4–8× | 45–90 |
| Apparel and fashion | 4–8× | 45–90 |
| Consumer electronics | 6–10× | 35–60 |
| Wholesale and distribution | 5–10× | 35–75 |
| Pharmacy | 8–14× | 25–45 |
| Auto and industrial spares | 2–4× | 90–180 |
| Building materials | 4–6× | 60–90 |
| Jewellery and luxury | 1–2× | 180–365 |
These are broad ranges, not targets. Turnover is a property of what you sell far more than of how well you manage it. A spares distributor at 3× may be excellent; a grocer at 3× is throwing away perishable stock every week. Compare against your own history first, your sector second, and never against an unrelated industry.
Higher is not always better
Rising turnover generally means less capital tied up and less obsolescence risk. Beyond a point it means you are running thin, and the costs of thin do not appear anywhere in the turnover calculation:
- Stockouts and lost sales — the customer who goes elsewhere is invisible in your numbers.
- Expedited freight to cover the gaps.
- More frequent ordering, so higher ordering cost.
- Loss of quantity discounts.
- Staff time spent firefighting.
This is why turnover must be read next to a service-level or stockout measure. Turnover taken alone can be "improved" by simply refusing to hold stock, which is not an improvement in anything but the ratio.
The blended-average trap
A single company-wide figure conceals the thing you most need to see. Consider two businesses, both at 6×:
| Business A | Business B | |
|---|---|---|
| Fast lines | 6× across the board | 20× |
| Slow lines | none | 0.4× |
| Blended | 6× | 6× |
| Reality | Uniformly healthy | Half the capital is in dead stock |
Business B has a serious problem that the headline number hides completely. Always calculate turnover by category and read it beside an ageing report, which shows what has not moved at all. ABC analysis tells you where the value sits; turnover tells you how fast it is cycling; ageing tells you what is not cycling at all. You need all three.
How to improve it honestly
- Deal with dead stock deliberately. Discount it, bundle it, return it, or write it off. It is already a loss — carrying it only delays recognising it while consuming space and capital.
- Shorten lead times. This is the highest-quality lever, because less safety stock is needed for the same service level. Turnover rises with no increase in risk.
- Order smaller and more often where EOQ supports it, particularly on A items.
- Prune the tail. Lines selling twice a year rarely earn their working capital or their shelf space.
- Set reorder points properly so you are not carrying arbitrary buffers on products that never needed them.
What not to do: improve the ratio by cutting stock on your best-selling lines. It works arithmetically and costs you the sales that pay for everything else. If turnover improves while revenue falls, you have not become efficient — you have become smaller.