About the Inventory Turnover
Inventory turnover tells you how many times a year you sell through your stock; days of inventory turns that into the number of days money sits on the shelf. Together with debtor and creditor days they form the operating cycle a bank uses to size a working-capital limit, so a slow turnover directly raises the money you need to borrow.
Enter the cost of goods sold for the year and the opening and closing stock; the calculator gives average stock, the turnover ratio and days of inventory. Compare the days with the credit period your suppliers give you: if stock sits longer than the creditors wait, you are financing the gap.
Turnover benchmarks differ widely — a grocer turns stock many times a month, a furniture maker a few times a year. Compare against your own past years and the norm your bank uses for your trade.
How to use it
- 1Enter the cost of goods sold for the year (from the P&L).
- 2Enter the opening and closing inventory (from the balance sheets).
- 3Read the average inventory, the turnover ratio and days of inventory.
- 4Compare the days with your supplier credit period.
How this is calculated
Average inventory = (opening + closing) ÷ 2 Inventory turnover = cost of goods sold ÷ average inventory Days of inventory = 365 ÷ turnover
Frequently asked questions
Should I use sales or cost of goods sold?
Cost of goods sold, because inventory is valued at cost. Using sales inflates the ratio by the margin.
What is a good turnover ratio?
It depends on the trade. FMCG and food retail turn stock many times a month; capital goods and jewellery a few times a year. Improving on your own last year, and matching what your bank's assessment assumes, matters more than an all-industry number.
How does this affect my bank limit?
Days of inventory is one of the three inputs to the working-capital cycle. Cutting inventory days lowers the working-capital gap and the margin the bank expects you to bring — see the MPBF and working-capital calculators.
My closing stock is unusually high — what then?
Average inventory smooths a one-off, but a seasonal build-up before peak season will still push days up. Use monthly stock figures for a truer average if you have them.