Inventory Turnover: What It Means and How to Improve It

What Is Inventory Turnover?

Inventory turnover measures how many times your business sells and replaces its inventory over a period (usually a year). A higher ratio means you're selling goods quickly. A lower ratio may indicate overstocking or weak sales.

Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory Value

What Is Days Sales of Inventory (DSI)?

DSI tells you how many days it takes, on average, to sell your entire inventory. Lower DSI = faster sales.

Formula: DSI = 365 / Inventory Turnover Ratio

Industry Benchmarks

| Industry | Typical Turnover | |----------|-----------------| | Grocery | 14–20x | | Restaurant | 12–16x | | Ecommerce | 6–10x | | Retail (General) | 4–6x |

What Is Carrying Cost?

Carrying cost (or holding cost) is the total expense of storing unsold inventory — including warehousing, insurance, depreciation, and opportunity cost. A common estimate is 25% of your average inventory value per year.

How to Improve Inventory Turnover

1. Identify dead stock — Run regular reports to find items that haven't sold in 90+ days. Discount or liquidate them.
2. Tighten purchasing — Order smaller quantities more frequently instead of large bulk orders.
3. Negotiate supplier terms — Shorter lead times let you carry less safety stock.
4. Use demand forecasting — Track seasonal patterns and adjust orders accordingly.
5. Optimize pricing — Items priced too high sit on shelves. Test price points to find the sweet spot.

When High Turnover Is a Problem

Very high turnover can mean you're running too lean. If you frequently stock out, you're losing sales and frustrating customers. The goal is a healthy balance between efficiency and availability.

Connect to Your Bigger Picture

Your inventory turnover directly affects your cash flow. Money tied up in inventory is money that can't cover payroll, rent, or growth investments. Use the Cash Flow Forecast to see how improving turnover frees up working capital.