What is inventory turnover?
Inventory turnover shows how quickly money tied up in stock turns back into money in the bank. With high turnover, products sit on the shelf briefly. With low turnover, a lot of money is stuck on the shelf, and you pay for storage longer.
It is the same story as days of inventory, told the other way round. Days of inventory says how long your stock will last; inventory turnover says how often it goes round in a year.
How do you calculate it?
Take the cost value of everything you sold in the past year. Divide it by the average value of your inventory over that year, also at cost.
Example: in one year you sold €400,000 worth of products, valued at cost. Your inventory was worth €100,000 on average. Inventory turnover is 400,000 ÷ 100,000 = 4. Your stock turns over 4 times a year and sits on the shelf for about 365 ÷ 4 ≈ 91 days on average.
What to watch out for
Use an average inventory, not just the level on 31 December. After the holidays your stock is often low, which makes turnover look better than it is. Take, for example, the average of the levels at the end of each month.
Look per product. An average of 4 can hide fast sellers that turn 12 times and products that barely move. The latter are on their way to becoming dead stock. If your stock is with Logistics via bol (LVB), it matters even more: bol charges a surcharge on stock that has been in its warehouse for more than 180 days.
In Ecommy
Ecommy calculates inventory turnover and days of inventory per product and per location, from your shop, marketplaces and inventory system. That way you see which products are holding on to cash before they become dead stock.