Inventory turns
Also called inventory turnover
Reviewed by Dasha ShakovVP Marketing, Proton
Updated
What is inventory turns?
Inventory turns is the number of times a distributor sells through its average inventory in a year: annual COGS ÷ average inventory at cost. Higher turns mean less cash tied up in stock for the same sales.
How it works
Average inventory can be the beginning and ending balances divided by two, or the average of the 12 or 13 month-end balances; the monthly average is more reliable, because a single year-end balance can be unusually low or high. Keep both sides at cost, since dividing sales by inventory at cost overstates turns.
Turns vary widely by vertical and product mix, so they are best compared within the same business or with similar distributors measured the same way. Whether slow-turning stock still earns its keep is a question for GMROI, and very high turns can also mean the shelves are too thin.
Inventory turns example
COGS last year was $6 million and the 13 month-end inventory balances average $1.5 million, so turns are 4, or about 91 days on hand. Dividing sales of $8 million by the same inventory would give 5.3, which overstates how fast stock moves.
Related terms
- Days on handDays on hand is the number of days a distributor’s inventory would last at its rate of sales.
- Gross margin return on inventory investment (GMROI)Gross margin return on inventory investment (GMROI) is the gross profit a distributor earns for each dollar it has invested in inventory.
- Cost of goods sold (COGS)Cost of goods sold (COGS) is the cost of the products a company sold during a period.
- Inventory carrying costInventory carrying cost is the total cost of holding inventory over time: the cash tied up, space, insurance, taxes, handling, damage and obsolescence.
- Dead stockDead stock is inventory that hasn’t sold for a long time and probably won’t sell at its normal price.
