How to Calculate Inventory Turnover and Ways to Improve It

Getting comfortable with calculating Inventory Turnover and improving it will make a tangible difference to your business. This guide walks you through clear steps for calculation, shows an example with numbers, and presents practical strategies that are friendly to beginners.

Step 1. Gather the numbers you need. For the period you want to analyze (commonly a year), you need:

• Cost of Goods Sold (COGS) for the period. Use the accounting figure that represents the direct cost of producing goods sold.
• Average inventory during the period. A simple method is (Beginning Inventory + Ending Inventory) / 2. For seasonal businesses, use a monthly average to smooth spikes.

Step 2. Apply the formula.

Inventory Turnover = COGS / Average Inventory

Step 3. Convert turnover into days on hand (optional but helpful):

Days on Hand = 365 / Inventory Turnover

Practical example. A local electronics retailer had annual COGS of 900,000. Its inventory at the start of the year was 200,000 and at year-end 100,000, so average inventory is 150,000. Turnover = 900,000 / 150,000 = 6. That means inventory turns six times a year, or Days on Hand = 365 / 6 ≈ 61 days. In plain terms, the retailer sells and replaces its average stock every two months.

What does that number tell you? If industry peers typically turn electronics inventory 10 times a year, the retailer can investigate ways to increase turnover. If peers turn 4 times a year, the retailer may already be efficient.

Ways to improve Inventory Turnover — practical tactics:

• Improve demand forecasting: Better sales forecasts reduce overstocking. Start with simple historical sales analysis and seasonality adjustments. Tools can automate this but even basic trend charts help.
• Segment inventory (ABC analysis): Treat top-contributing SKUs differently. Focus tighter replenishment on high-value, fast-moving items and keep safer buffer stock for slow movers.
• Reduce lead times and LOT sizes: Work with suppliers to shorten lead times or accept more frequent, smaller deliveries. This reduces average stock without increasing stockouts.
• Rationalize SKUs: Remove or discontinue clearly slow sellers. Consolidate similar SKUs to avoid redundant stock.
• Use promotions and bundling: Move slow inventory through discounts, promotions, or product bundles. Time promotions to avoid eroding margins unnecessarily.
• Optimize order quantities: Apply economic order quantity (EOQ) where appropriate, but balance EOQ against turnover goals and warehousing costs.
• Adopt FIFO and inventory rotation: For retailers and especially perishables, use first-in-first-out to prevent obsolescence.
• Cross-dock and drop-shipping: Minimize storage by moving goods directly from inbound to outbound for fast-moving items, or use supplier drop-shipping to avoid holding certain SKUs.
• Collaborate with suppliers: Consider vendor-managed inventory (VMI) or consignment to reduce your capital tied up in stock.
• Use technology: Even simple inventory management tools can automate reorder points, track sales trends, and provide SKU-level turnover that spreadsheets cannot easily show.

Risks and trade-offs to watch for:

• Too much focus on turnover can cause stockouts: Aggressively cutting inventory to boost turnover may lead to lost sales and damaged customer relationships.
• Seasonality and new products distort averages: High season spikes may hide poor performance in the rest of the year. Use rolling or monthly averages for clearer insight.
• Mix matters: A high company-wide turnover might be driven by a few fast SKUs while many others stagnate. Measure turnover at SKU or category level for better actions.

Example of a balanced improvement plan. A mid-sized food distributor had a turnover of 3 with Days on Hand of 122. By improving forecasting, negotiating weekly deliveries on key SKUs, and implementing FIFO, they raised turnover to 5 over 12 months, reducing Days on Hand to 73. They achieved this while maintaining a 98 percent order fill rate by keeping safety stock for perishable SKUs and closely monitoring supplier reliability.

Beginner implementation roadmap:

1. Calculate current turnover at company and SKU levels.
2. Identify top slow-moving SKUs and run ABC segmentation.
3. Investigate supplier lead times and delivery frequency.
4. Test small changes: a targeted promotion for slow SKUs, or switching a supplier to weekly deliveries.
5. Measure results monthly and adjust reorder points and safety stock accordingly.

Improving Inventory Turnover is not a one-time activity but a continuous loop of measurement, testing, and adjustment. For beginners, start simple, focus on the biggest opportunities, and use data to guide decisions. Over time, these steady improvements compound into better cash flow, lower costs, and a more competitive operation.