1
Key Concepts
Inventory turnover ratio measures how many times you sell and replace your inventory over a given period, calculated as cost of goods sold divided by average inventory value. A low ratio means capital is tied up in unsold stock for longer, increasing storage costs and the risk of that stock becoming obsolete or unsellable. A very high ratio can also signal a problem — potentially understocking and missing sales, or ordering too frequently in small, inefficient batches. The right turnover rate varies significantly by category (fashion typically turns faster than durable goods).
2
Best Practices
Calculate turnover ratio per category or per SKU group, not just as one company-wide number — a single average can hide serious problems in specific slow-moving categories. Compare your ratio against category benchmarks rather than an arbitrary target, since 'good' turnover varies significantly between fashion, electronics, and other product types. Use a declining turnover trend as an early warning signal to investigate specific SKUs before they become significant dead stock.
3
Implementation
Calculate your turnover ratio for your top 5 product categories using your last 12 months of data — this usually reveals which categories are efficiently converting inventory to cash and which are quietly tying up capital. For any category showing declining turnover, investigate whether it's a demand issue (reduce future orders) or a visibility issue (the product needs better marketing or placement).
Pro Tip
A single blended turnover ratio for your whole business can look healthy while hiding a specific category or set of SKUs that's actually losing money on carrying costs — always break it down by category.
Key Takeaways
- Turnover ratio = cost of goods sold ÷ average inventory value, calculated per category
- Low turnover ties up capital and increases obsolescence risk
- Very high turnover can signal understocking or inefficient small-batch ordering
- Compare against category-specific benchmarks, not one universal target
- Use declining turnover as an early signal to investigate specific SKUs
