Inventory turnover

Inventory turnover, also known as stock turnover or stock rotation, is a financial indicator measuring how many times a company sells and replaces its inventory over a given period. It shows how efficiently the company manages and turns over its stock.

How it is calculated

Inventory turnover is calculated by dividing the cost of goods consumed in a period by the average inventory for the same period. The formula is as follows:

Inventory turnover = Cost of goods consumed / Average inventory

Where average inventory = (Opening inventory + Closing inventory) / 2

The cost of goods consumed is opening inventory plus purchases in the period less closing inventory, that is, what has actually been taken out of stock during the period. It is not the same as purchases, which are larger than the cost of goods consumed when the stock is being built up.

What is it used for?

Inventory turnover is used to assess the efficiency and profitability of inventory management. It gives an insight into how quickly the company is able to turn over its inventory and minimise storage costs, the risk of goods becoming outdated, and the risk of goods losing value.

Tips for improving inventory turnover

1. Optimise ordering. Use forecasts and demand analysis to order the right quantity of goods, so as to avoid overstocking or understocking.
2. Improve inventory management. Implement effective inventory management systems and processes in order to increase the accuracy of stock records, reduce losses and improve the availability of goods.
3. Implement the JIT principle. Consider using the just-in-time (JIT) principle in order to minimise storage time and the costs connected with inventory. This involves receiving goods from suppliers just in time to meet customer demand.
4. Monitor slow-moving goods. Identify and deal with goods with low turnover or high storage requirements in order to avoid tying up capital in slow-moving stock.
5. Strengthen cooperation with suppliers. Build strong relationships with suppliers in order to secure reliable, rapid delivery of goods and reduce lead times.

By increasing inventory turnover, a company can improve profitability, reduce the capital tied up in stock and make inventory management more efficient. It is important to find a balance between holding enough stock to meet customer demand and avoiding overstocking, which can have a negative effect on the company's liquidity and profitability.

Read more about how the key figures in Capassa keep inventory turnover updated automatically.