Inventory Turnover is the number of times your inventory cycles or turns over in a year. Inventory turnover can help an organization understand how efficiently their inventory is supporting sales. The inventory turnover number implies how often inventory was bought and sold throughout the year. Low inventory turnover numbers often hint at overstocking, obsolescence or unstable processes. A high inventory turnover can also be dangerous if it is depleting reserves to quickly.
How to calculate:
Inventory turnover is calculated by dividing the cost of goods sold by the average amount of inventory.
Bill has an average inventory of 400 in his first year of business. His average cost of goods sold is $1300.00. In his second year his average inventory is only 100, but his cost of goods sold has increased to $1400.00.