How to manage inventory turnover

Calculate your inventory turnover

Divide cost of goods sold for a period by your average inventory for the same period. The result is how many times you sold and replaced stock.

Average inventory is the beginning balance plus the ending balance, divided by two. Example: if annual cost of goods sold is $600,000 and average inventory is $100,000, turnover is 6 times a year. Dividing 365 by 6 gives about 61 days to sell through stock. These numbers are examples.

Our guides to the inventory turnover ratio and calculating cost of goods sold go deeper into the formula and the inputs.

Run the calculation by product category as well, not only for the whole business. A healthy overall number can hide one category that holds a third of your cash and moves once a year.

Compare against the right benchmark

A good turnover depends on the industry. Grocery and restaurants turn stock quickly, while furniture, jewelry and heavy equipment turn slowly. Compare against your own history and similar businesses.

Industry associations and trade publications often publish typical ranges. Do not rely on a generic number. A boutique with seasonal stock should compare spring against spring, not spring against winter.

The most useful comparison is your own trend. If turnover has dropped over the last four quarters, ask why. New product lines, discounting, supply changes or a shift in customer taste can all slow it down.

Watch gross margin alongside turnover. Slow items sometimes carry high margins, and fast items may have thin ones. The goal is not the fastest stock but the stock that produces the most profit per dollar tied up, which owners call gross margin return on inventory.

Split your stock by what sells

Rank items by sales and profit. Put fast sellers on a tight reorder schedule and slow sellers on a plan to clear.

A simple ABC sort works. A items are the top sellers that make up most of your revenue. B items are the middle. C items are the long tail that rarely moves. Keep enough A items to avoid stockouts, order B items on a regular rhythm, and cut or reduce C items.

• Count stock on a schedule, with A items counted most often
• Mark items that have not sold in 90 days
• Bundle, discount or return slow items to the supplier
• Drop products that never recover

See inventory accounting basics for how to value what you hold.

Review the C list every quarter. Many owners keep items out of habit or because a few customers asked once. If a product earns less than the cost of storing, insuring and counting it, it is a candidate to drop.

Set reorder points and order quantities

Reorder when stock drops to the level you will use during the supplier's lead time, plus a small safety buffer. This keeps you from both stockouts and overbuying.

Example: if you sell 20 units a week and the supplier takes 2 weeks to deliver, your reorder point is 40 units plus a buffer, say 10, so 50. When stock reaches 50, you place the order. The figures are illustrative.

Review these numbers every season. Lead times and sales rates change, and a reorder point that worked last year can leave you short in a busy month or heavy in a slow one. Good records matter, so reconcile counts with your books monthly.

Safety stock should be modest. Holding extra of everything defeats the point of managing turnover. Add a buffer only for items that are hard to replace or that you know vary sharply in demand, and review that list regularly.

Shorten the time cash sits in stock

Negotiate smaller, more frequent deliveries, longer payment terms and consignment when possible. Each step releases cash tied up in inventory.

Talk to suppliers about minimums and terms. Our guide to finding suppliers covers alternatives when your current ones will not budge. Also look at your own sales process. Better product photos, online listings, bundles and promotions can move slow items without deep discounts.

Track the cash effect: if you cut average inventory from $100,000 to $80,000 at the same sales, you free about $20,000 of cash. That is real money for payroll or growth.

Seasonal sellers should plan the build-up and wind-down together. Buy ahead for the peak, but set a date after which leftover stock goes on promotion so it does not sit through the off-season.

Fund inventory when growth needs it

Fast turnover supports funding, because stock that sells quickly pays the funding back quickly. Match the funding to the product's selling speed.

If you can turn a $30,000 inventory purchase into $50,000 of sales within 60 days, a short working-capital product can pay off. If the stock takes six months to sell, a longer-term product or a smaller order is safer. Our post on inventory funding payback math shows how to check this.

ROI Funder places working capital, term loans and lines of credit for businesses with 6+ months in operation and $20,000+ in monthly revenue. We show true cost and payback first, and applying is a soft pull.