Inventory Turnover
Definition
How many times you sell through your average inventory in a year. Higher turnover means cash spends less time sitting on shelves.
Want a deeper explanation?
Formula
Inventory Turnover = Annual COGS ÷ Average InventoryInventory turnover is a measure of how hard your cash is working. Every time stock sells through, the cash comes back to be reinvested, so a business turning inventory six times a year can grow on far less money than one turning it twice.
Too high can be a problem too, if it means constant stockouts and lost rankings. Watch for: turnover falling over time, which usually means slow sellers are piling up even if total sales look fine.
Example
$1,200,000 of annual COGS and $300,000 average inventory gives a turnover of 4x, roughly every 3 months.