For any business holding stock, the single most important efficiency metric. Inventory turnover tells you whether your inventory is selling fast enough to justify the cash tied up in it.
Definition
Inventory Turnover - the number of times inventory is sold and replaced during a period, calculated as Cost of Goods Sold divided by average inventory.
Formula
Inventory Turnover = COGS ÷ Average Inventory Days Inventory Outstanding (DIO) = 365 ÷ Inventory Turnover
Common uses
- Working capital management - lower inventory = more cash freed up
- Operational efficiency - higher turnover usually means better demand planning
- Stockout risk - very high turnover may signal under-investment in inventory
Watch out
Slow-moving inventory ties up cash and often loses value over time (obsolescence, fashion changes, expiration). The bottom 20% of SKUs by velocity often represent 50%+ of locked-up cash.