# What Is Inventory Turnover?

## Knowing Your Turn Will Make You Money, Not Knowing Your Turn Will Cost You Money

Inventory turnover is a measure of how fast a retailer sells through its inventory and needs to replace it. The faster you "turn" your inventory, the more inventory you will need in a year. The formula is a simple one:

### Sales / Inventory

For example, if your store sold \$100,000 in goods and had \$50,000 worth of inventory, then your inventory turn would be 2, meaning you turn over your inventory two times for that time period measured.

Inventory turn is typically looked at on a calendar year basis. Meaning that you are calculating how many times you will turn that item in a year. Even though you may be looking at it in a shorter period, you can extrapolate that time period out to equal a year.

Another way to calculate is with Cost of Goods Sold (COGS). in this formula:

### Cost of Goods Sold / Average Inventory

And some POS systems measure turn as:

Number of Units Sold / Average Number of Units (both during a specified period of time)
Inventory turn is a very important calculation for retailers. While one might think that the higher the turn, the better, the truth is too high of a turn may mean you are not stocking enough of the SKU. For example, if you have a 52 times turn on an item, then you are selling four to five per month. If it takes three weeks to replenish that stock, then you will have missed sales during that period since logically you are selling at an average of one per week.

The point here is to raise your backstock and lower the turnover to make sure you do not miss any sales.

On the other end, if you have a turn of 1 on an item and you have 12 of that item on hand in backstock, then you have way too many of that SKU. In this scenario, you have a 12-month supply. For most retailers, a turn of 2 to 4 is ideal.

It is because it matches the replenishment of the item within the sales cycle. This means that you get the new one in before you need it. Remember, inventory in the back room is cash in jail. Having inventory does you no good until you sell it.

Too many retailers make the mistake of being over-inventoried. This is when they have way more inventory than what they need. A telltale sign of this condition is to examine inventory turnover. If the turn for the store is 1, then you can safely assess that there is more inventory on hand than is needed.