Inventory Turnover Ratio Explained: What It Is & Why It Matters

How many times did you sell through your entire inventory last year?

If you don’t know the answer, you might be missing a key insight into how your business is performing.

The Inventory turnover ratio gives you a clear view into how fast your products are moving and whether your cash is tied up in slow-moving stock or being reinvested in growth.

In this blog, we’ll break down the formula, explain the numbers, and help you improve your inventory strategy without overcomplicating it.

What Is Inventory Turnover Ratio?

Inventory Turnover Ratio tells you how many times you’ve sold and replaced your inventory over a specific period, usually a year. It gives you a clear picture of whether your products are flying off the shelves or just collecting dust.

In simple terms:

It measures how efficiently you’re managing and selling your inventory.

High turnover usually means strong sales or great stock control.

Low turnover?

That might point to overstocking, poor demand forecasting, or dead stock issues.

How to Calculate Inventory Turnover Ratio

The formula is simple:

Inventory Turnover Ratio = Cost of Goods Sold (COGS) ÷ Average Inventory

To calculate it:

1. Find your COGS for the period (usually for the year).
2. Calculate average inventory using:
3. (Beginning Inventory + Ending Inventory) ÷ 2

Then divide your COGS by your average inventory.

Example:

If your COGS is $200,000 and your average inventory is $50,000:

Inventory Turnover Ratio = 200,000 ÷ 50,000 = 4

This means you turned over your inventory four times in the year.

What’s a Good Inventory Turnover Ratio?

A “good” inventory turnover ratio depends on what you sell but generally, the higher the ratio (without causing stockouts), the better.

For most eCommerce businesses, a turnover ratio between 4 and 8 is considered healthy. It means you’re selling through your stock every 1.5 to 3 months, which is typically a good balance between demand and inventory holding costs.

Here are some general benchmarks:

If your ratio is too low, you might be overstocked or selling slowly.

If it’s too high, you could be running lean at risk of stockouts or missed sales.

The key is to align turnover with your product lifecycle, lead times, and customer demand.

Low vs High Inventory Turnover: What Do They Mean?

Your inventory turnover ratio isn’t just a number, it tells a story about how your business runs day to day.

Low Inventory Turnover

A low ratio means your products aren’t selling quickly. That could point to:

• Overstocking or poor demand planning
• Products that are outdated or not in demand
• Pricing that’s too high compared to competitors

What it leads to:

Cash tied up in unsold stock, higher storage costs, and increased risk of inventory becoming obsolete.

High Inventory Turnover

A high ratio means you’re selling quickly and restocking often. That sounds great—but it comes with its own risks:

• Frequent stockouts if you’re not replenishing in time
• Pressure on operations and suppliers
• Potential missed sales if demand spikes unexpectedly

How to Improve Your Inventory Turnover Ratio

Improving your inventory turnover ratio means selling through your stock faster, without risking frequent stockouts. It’s about smarter planning, not just faster selling.

Here are effective ways to improve it:

1. Forecast Demand Accurately: Use past sales data, seasonality trends, and market insights to predict what will sell. Better forecasting helps you stock only what’s needed and avoid overordering.‍
2. Clear Out Slow-Moving Stock: Run targeted discounts, bundle offers, or limited-time deals to move older inventory. This frees up space and cash for high-demand products.‍
3. Shorten Reorder Cycles: Instead of placing large, infrequent orders, consider smaller, more frequent reorders. This keeps inventory fresher and reduces holding costs.‍
4. Review Pricing Strategy: If items aren’t selling, pricing might be the issue. Small adjustments can increase sell-through while protecting your margins.‍
5. Analyze Product Performance Regularly: Track inventory turnover by product or category. Drop or adjust SKUs that consistently underperform and double down on bestsellers.

Common Mistakes in Measuring Inventory Turnover

Many businesses miscalculate the inventory turnover ratio without realizing it, resulting in misleading insights and poor inventory decisions. To make the ratio work for you, it’s important to avoid these common mistakes:

1. Using Sales Revenue Instead of COGS: The turnover formula requires Cost of Goods Sold (COGS). Using sales revenue instead inflates the ratio and distorts performance.‍
2. Not Updating Inventory Values Regularly: Using outdated or inaccurate beginning and ending inventory values skews the average and leads to unreliable results.‍
3. Ignoring Category-Level Tracking: Measuring turnover for your entire inventory can hide underperforming products. Tracking by category or SKU gives clearer insights.‍
4. Overlooking Seasonality: Comparing seasonal product turnover across non-peak months can be misleading. Always consider the time period and sales cycle.‍
5. Using Retail Value Instead of Cost: Inventory should be measured at cost, not retail price. Using retail value overstates inventory and throws off the calculation.

Conclusion

Inventory turnover ratio is a window into the health of your business. It demonstrates how effectively you’re managing cash flow, inventory decisions, and customer demand.

Whether your turnover is too low (and costing you in holding fees) or too high (and risking stockouts), the goal is balance.

Improving turnover begins with enhanced visibility, accurate data, and expedited decision-making.

That’s where tools like Sumtracker can help by giving you real-time insights into stock movement, product performance, and restock needs across all your sales channels. So instead of guessing, you’re always acting on the right data at the right time.

Master your turnover ratio, and you’ll not only move inventory, you’ll move your business forward.

FAQs

What is the inventory turnover ratio?

It’s a metric that shows how many times your inventory is sold and replaced over a period. It helps measure how efficiently you manage and sell your stock.

How often should I calculate the inventory turnover ratio?

It’s best to calculate it monthly or quarterly to catch trends early, especially if your sales are seasonal. Annual calculations provide a big-picture view, but frequent checks facilitate faster decision-making.

What does a low inventory turnover ratio indicate?

A low ratio typically means products are selling slowly. This could be due to overstocking, poor demand forecasting, or low demand for the product. It often leads to higher holding costs and cash flow issues.

Can a high inventory turnover ratio be a bad thing?

Yes. While it often indicates strong sales, a very high turnover ratio could mean you’re understocked and frequently running out of inventory, leading to missed sales and customer dissatisfaction.

Should I calculate inventory turnover using retail value or cost?

Always use the cost of goods sold (COGS) and inventory at cost, not retail value. This gives you an accurate view of how efficiently you're managing stock from a financial perspective.

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