What Is Inventory Turnover?
Formula, days in inventory, and a worked example.
Home › Accounting Glossary › Inventory Turnover
| Average inventory | (Opening inventory + Closing inventory) ÷ 2 |
|---|---|
| Days in inventory | 365 ÷ Inventory turnover |
| Topic | Financial accounting · Efficiency ratios |
Inventory turnover in plain English
A high turnover means stock sells quickly, so less cash is tied up in inventory. A low turnover can mean slow-selling or obsolete stock. The right level depends on the type of business: a supermarket turns stock over very quickly, a furniture dealer much more slowly.
Worked example
Cost of goods sold is 90,000. Opening inventory is 20,000 and closing inventory is 25,000.
- Average inventory = (20,000 + 25,000) ÷ 2 = 22,500.
- Inventory turnover = 90,000 ÷ 22,500 = 4 times a year.
- Days in inventory = 365 ÷ 4 = about 91 days.
On average, stock takes about 91 days to sell.
- Using sales instead of cost of goods sold. Use cost, to compare like with like with inventory at cost.
- Using only closing inventory instead of the average.
Frequently asked questions
Is a higher inventory turnover always better?
Not always. Very high turnover can mean stock-outs and lost sales. What is ideal depends on the industry.
What does a low inventory turnover suggest?
Stock is selling slowly, which may mean overstocking, weak demand or obsolete goods.
How do you calculate days in inventory?
Divide 365 by the inventory turnover, or divide average inventory by cost of goods sold and multiply by 365.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.