Inventory Turnover

How many times a year stock sells through and replenishes

Inventory ControlTurnover, Days & the Cash CycleFree preview

⏱️ About 15 min

Modules 2 and 3 set how much to order and when. They say nothing about how fast stock actually moves. Inventory turnover is the speedometer: how many times a year the average shelf clears and refills.

💡

The big idea: Inventory Turnover = COGS / Average Inventory. It counts how many times the average inventory is sold and replaced over the year. A higher turnover means stock moves faster and less cash is parked on the shelf; a lower turnover signals slow-moving stock and heavier carrying costs.

🎯 By the end, you'll be able to

State the inventory-turnover formula Turnover = COGS / Average Inventory and define each term.
Compute inventory turnover from annual COGS and average inventory.
Explain why a higher turnover means less cash tied up in stock.

📎 Helpful to know first

Comfort with ratios and division; Module 2 (The EOQ Model) is helpful but not required.

When stock moves, money moves

Reorder points answer when to buy and the EOQ answers how much; neither says how briskly stock flows. Inventory turnover does. It counts how many times the average inventory is sold and replenished in a year, computed from two figures any buyer already tracks -- the annual cost of goods sold (COGS) and the average inventory held over the year (the average of beginning and ending stock).

\[ \text{Inventory Turnover} = \frac{\text{COGS}}{\text{Average Inventory}} \]

Reading the formula

With annual COGS of $1,200,000 and average inventory of $200,000, turnover = COGS / AvgInv = 1,200,000 / 200,000 = 6.0 times per year -- the average shelf clears and refills six times. Trim average inventory to $150,000 (COGS fixed) and turnover rises to 1,200,000 / 150,000 = 8.0: leaner stock, faster turns. Raise COGS and turnover rises too, because more goods flow through the same base.

🔑 Higher turnover, less cash parked

Turnover is a speedometer for stock. A higher turnover means goods leave the shelf quickly and less cash is parked in inventory; a low turnover signals slow-moving stock, heavier carrying costs, and rising obsolescence risk. Turnover is most informative tracked over time or compared across similar products -- a single number means little without context.

🎮 Inventory Turnover Calculator LIVE

Predict first: Predict first: with COGS $1,200,000 and average inventory $200,000, what is the inventory turnover?

Slide COGS and average inventory to watch the year divide into more or fewer turns.

📝 Worked example: Meridian Supply has annual COGS of $1,200,000 and average inventory of $200,000. Find the inventory turnover.

1. Turnover = COGS / AvgInv = 1,200,000 / 200,000 = 6.0 times per year.

✓ Turnover = 6.0 times per year

✏️ Practice: With annual COGS of $1,000,000 and average inventory of $250,000, what is the inventory turnover?

times/year

💡 Hint

Divide COGS by average inventory: Turnover = COGS / AvgInv.

Solution

1. Turnover = COGS / AvgInv = 1,000,000 / 250,000 = 4.0 times per year.

Check your understanding

1. Inventory turnover is given by which formula?

Turnover = COGS / Average Inventory: annual cost of goods sold divided by the average inventory held.

2. With COGS $1,200,000 and average inventory $200,000, the inventory turnover is?

Turnover = 1,200,000 / 200,000 = 6.0 times per year.

✅ Key takeaways

Inventory Turnover = COGS / Average Inventory.
It counts how many times the average inventory sells through and replenishes each year.
A higher turnover means less cash parked in stock and lower carrying costs.

➡️ Turnover is a rate -- six times a year. The next lesson turns that rate into a duration: how many days, on average, a unit of stock sits on the shelf before it sells.

Ready for the next step? Back to the course outline →