How it works
Inventory turnover shows how many times you sell through your average inventory during a period. Days on hand (days inventory outstanding) converts that into how long, on average, an item sits before it sells.
Higher turnover usually means less cash tied up in stock and lower storage and obsolescence costs. Too high can mean frequent stockouts and lost sales.
Use cost of goods sold, not sales revenue, so both sides of the ratio are measured at cost.
Formula
Turnover = COGS ÷ ((Beginning inventory + Ending inventory) ÷ 2). Days on hand = Days in period ÷ Turnover.
Questions people ask
What is a good inventory turnover ratio?
It depends on the industry. Grocery stores may turn inventory 12–20 times a year, general retail 4–8 times, and furniture or heavy equipment dealers only 2–4 times.
Why use average inventory?
Inventory changes through the period. Averaging the beginning and ending balances better reflects what you held while generating that cost of goods sold. Monthly averages are more accurate still for seasonal businesses.
Can I calculate it for a quarter?
Yes. Use that quarter's COGS and inventory, and set days in period to about 91. The turnover will be quarterly; multiply by 4 for a rough annual figure.