The formula
The inventory turnover is the business’s answer to one question: how many times does the stock sell through in a year. Take the cost of goods sold and divide it by the average inventory. A turnover of 4.00x means the stock sells through four times a year. This guide works it in seven steps.
Step 1 — Find the cost of goods sold
Start with the cost of goods sold: the direct cost of the goods that were sold in the period, from the income statement. It is the cost of making or buying what was sold: materials, direct labour and manufacturing overhead. It does NOT include rent, marketing or admin salaries. Use the same period for everything — a year, a quarter, a month. On the worked example the cost of goods sold is $1,200,000.00.
Step 2 — Find the average inventory
Now find the average inventory: (opening inventory + closing inventory) ÷ 2, from the balance sheet. Take the inventory at the start of the period, add the inventory at the end, and divide by two. Use the average, not a single snapshot, because stock levels swing through the year. On the worked example the average inventory is $300,000.00.
Step 3 — Divide the cost of goods sold by the average inventory
Divide the cost of goods sold by the average inventory. That is the turnover as a multiple. On the worked example it is $1,200,000.00 ÷ $300,000.00 = 4.00x. The stock sells through four times a year.
Step 4 — Turn the turnover into days of inventory
Divide 365 by the turnover. That is the days of inventory: how many days the stock on hand lasts at the current selling rate. On the worked example it is 365 ÷ 4.00 = 91.25 days. The business holds about three months of stock.
Step 5 — Work out the inventory the target needs
Divide the cost of goods sold by the target turnover to find the inventory the target needs. On the worked example the target is 6.00x, so the inventory needed is $1,200,000.00 ÷ 6.00 = $200,000.00. The largest whole-dollar average inventory for the turnover to stay at or above 6.00x is $200,000 — at $200,001 the inventory is $1 over the $200,000 allowed.
Step 6 — Work out the cost of goods sold the target needs
Multiply the average inventory by the target turnover to find the cost of goods sold the target needs. On the worked example the target is 6.00x, so the cost of goods sold needed is $300,000.00 × 6.00 = $1,800,000.00. The smallest whole-dollar cost of goods sold for the turnover to reach 5.00x is $1,500,000 — at $1,499,999 the cost is $1 short of the $1,500,000 needed.
Step 7 — Check the result against the 8x fast line and the 2x slow line
Compare the turnover with the lines: 8x or more is fast, 2x or less is slow and can mean slow-moving stock, over-ordering, or dead stock tying up cash. On the worked example the turnover is 4.00x, so the business sits between the lines. Below 2x the business holds more than 182.50 days of inventory; above 8x it holds less than 45.63 days.
Three worked examples
The headline example: $1,200,000.00 of cost of goods sold and $300,000.00 of average inventory. The turnover is $1,200,000.00 ÷ $300,000.00 = 4.00x, the days of inventory is 365 ÷ 4.00 = 91.25 days, the inventory needed for the 6.00x target is $200,000.00, and the cost of goods sold needed for the 6.00x target is $1,800,000.00. Average inventory of $150,000.00 instead: the turnover is 8.00x, the days of inventory 45.63 days. Cost of goods sold of $600,000.00 instead: the turnover is 2.00x, the days of inventory 182.50 days. Use the inventory turnover calculator for your own numbers.
Two reverses to check your answer
The largest whole-dollar average inventory for the turnover to stay at or above 6.00x is $200,000 — at $200,000 the turnover is 6.00x, and at $200,001 the inventory is $1 over the $200,000 allowed. The smallest whole-dollar cost of goods sold for the turnover to reach 5.00x is $1,500,000 — at $1,500,000 the turnover is 5.00x, and at $1,499,999 the cost is $1 short of the $1,500,000 needed.
What average inventory is, and why it is an average
Average inventory is (opening inventory + closing inventory) ÷ 2: the inventory at the start of the period plus the inventory at the end of the period, divided by two. It is an average because a single snapshot misleads: a shop that stocks up before Christmas and sells down after it would show a huge inventory in December and a small one in February, and neither snapshot is the year. A business with monthly figures can average all twelve months instead — the result is usually steadier.
Why a high turnover is good — and when it is too high
A high turnover is good because it means little cash sits on shelves: the business buys stock, sells it, and buys again, and the cash keeps moving. Grocery stores turn stock 10x or more a year because food sells fast; car dealers and furniture stores turn stock slowly, often below 4x. But a turnover that is TOO high can mean stockouts — shelves empty because the business orders too little. At 12.00x the business holds only 30.42 days of inventory, and a supplier delay of a week leaves the shelves bare.
What to do when the turnover is low
A turnover below 2x means each dollar of inventory takes more than 182.50 days to sell. The fixes are the formula’s two levers: sell more, or hold less. Sell more by cutting prices and clearing slow lines; hold less by ordering smaller batches more often, and by not reordering what does not move. The smallest whole-dollar cost of goods sold that reaches 5.00x is $1,500,000 — at $1,499,999 the cost is $1 short of the $1,500,000 needed.
How inventory turnover differs from gross profit margin and the cash conversion cycle
Gross profit margin divides gross profit by revenue: it tests what share of each sales dollar remains after the direct cost of goods sold, not how fast the stock sells. A business can have a fast turnover and a thin margin at the same time — a grocer turns stock 10x a year at a margin near 25%. The cash conversion cycle adds receivables and payables to the days of inventory: the full time from paying for stock to collecting the cash. Inventory turnover is the stock test; gross profit margin is the profit test; the cash conversion cycle is the cash test. See the gross profit margin calculator and the guide to calculating gross profit margin, and the operating margin calculator.