Inventory turnover calculator

Inventory turnover formula

Inventory turnover = cost of goods sold ÷ average inventory

Average inventory = (opening inventory + closing inventory) ÷ 2

Days of inventory (DIO) = average inventory ÷ COGS × days in the period

Turnover says how many times the stock was sold and replaced in the period. DIO says the same thing in days: how long the average stock would last at the current rate of sales. The two are linked by DIO = days in the period ÷ turnover.

Keep both sides at cost: COGS against inventory valued at cost. If you only have units, units sold divided by average units on hand gives the same ratio for a SKU without any costs.

365 days or the days in the period?

DIO turns a ratio into days, so the number of days has to match the period the COGS covers.

• Annual COGS: use 365 days. Some analysts use 360 for round numbers, which makes DIO about 1.4% lower.
• Quarterly COGS: use the days in the quarter, 90 to 92, or 91.25 as an average quarter.
• Monthly COGS: use the days in the month, or 30.42 as an average month.

The mistake to avoid is quarterly or monthly COGS with 365 days: DIO comes out four or twelve times too high. The calculator uses the period you pick and also shows annualized turnover, which puts a quarter or a month on the same scale as a yearly figure:

Annualized turnover = turnover in the period × 365 ÷ days in the period

Worked example

A business has COGS of 1,200,000 for the year. Inventory at cost was 280,000 at the start of the year and 320,000 at the end.

• Average inventory: (280,000 + 320,000) ÷ 2 = 300,000.
• Turnover: 1,200,000 ÷ 300,000 = 4.0 turns a year.
• DIO: 365 ÷ 4 = 91.25 days, three months of stock.

Now one quarter: COGS of 330,000 with the same 300,000 average inventory, using an average quarter of 91.25 days.

• Turnover: 330,000 ÷ 300,000 = 1.1 turns in the quarter, or 4.4 annualized.
• DIO: 300,000 ÷ 330,000 × 91.25 = 82.95 days.
• With 365 days by mistake: 300,000 ÷ 330,000 × 365 = 331.82 days, four times too high.

Two balances can mislead

Opening plus closing divided by two is the textbook average, but a seasonal business may hold the least stock at both year-ends and far more in between. That average understates the stock you carried and overstates turnover. When you have them, average the month-end balances instead: for a year, the opening balance plus the twelve month-ends, divided by 13. Enter the result as average inventory.

What is a good inventory turnover?

It depends on the business. Fresh food turns over in days; spare parts and furniture in months. The useful comparisons are with your own history and with similar businesses: a falling ratio means stock is growing faster than sales.

A company-wide figure also hides the mix. An average of 4 turns can be best sellers turning 12 times a year and a long tail turning less than once. Measure turnover by SKU and category to see where the cash sits; an ABC analysis shows which SKUs carry the value.

Common mistakes

• Dividing revenue by inventory at cost, which inflates turnover by the gross margin.
• Using quarterly or monthly COGS with 365 days.
• Averaging only two year-end snapshots in a seasonal business.
• Raising turnover by cutting stock across the board. The ratio improves while service on the best sellers drops; cut the slow movers instead.

Turnover and coverage for every SKU

In Varox Reporting, inventory turnover is shown by SKU and group, next to months of coverage: closing stock divided by average monthly demand. The Delivery Planner projects stock forward month by month from the forecast and shows months and days of coverage for every SKU, so overstock is visible before you order, not after.

Questions

How do you calculate inventory turnover?

Divide the cost of goods sold for a period by the average inventory at cost for the same period. For a single SKU you can use units instead: units sold divided by average units on hand.

What is days inventory outstanding (DIO)?

The number of days the average inventory would last at the current rate of sales: average inventory divided by COGS, times the days in the period. It is the same information as turnover expressed in days: DIO = days in the period ÷ turnover.

Should I use 365 or 360 days?

Use 365 with a full year of COGS, and the days in the period for quarterly or monthly figures. Some finance teams use 360 for simpler arithmetic; that is fine if you use it consistently, but it makes DIO about 1.4% lower.

Why use COGS and not sales?

Inventory is carried at cost, so the other side of the ratio should be at cost too. Dividing revenue by inventory at cost mixes the gross margin into the ratio and overstates turnover.

Is a higher inventory turnover always better?

No. Higher turnover frees cash, but pushed too far it means stockouts, smaller and more frequent orders, and lost sales. Look for low turnover in the slow movers first, and keep enough stock on the best sellers.