Financial Glossary
Inventory Turnover
Inventory turnover measures how many times a company sells and replaces its inventory during a period, calculated as Cost of Goods Sold divided by Average Inventory. A higher ratio indicates faster-moving inventory and more efficient use of working capital; a lower ratio signals potential overstocking, obsolescence, or slow sales. Turnover targets vary by industry -- grocery retailers may turn inventory 20 to 30 times per year while specialty equipment dealers may turn it 3 to 5 times. Days Inventory Outstanding (DIO) expresses the same metric as the average number of days inventory is held: DIO = 365 divided by Inventory Turnover.
Problem & Application
A marina ship store carries an average inventory of $80,000 in fuel additives, safety gear, apparel, and boating accessories. Annual cost of goods sold is $240,000. Inventory turnover = $240,000 divided by $80,000 = 3.0 turns per year, or roughly 122 days on hand. Industry benchmarks for marina retail suggest 4 to 5 turns is achievable with good buying discipline. Analyzing inventory by SKU reveals that apparel turns 1.8 times per year (overstocked, slow) while safety gear turns 6 times (undersupplied, leaving sales on the table). Rebalancing the buy -- reducing apparel open-to-buy and increasing safety gear reorder frequency -- moves overall turnover toward 4.2 and frees $19,000 in working capital that was tied up in slow-moving shirts. For operators with seasonal demand curves, tracking turnover by product category by season surfaces the same insight more precisely.
In Short
Monitoring inventory turnover is essential for maintaining operational efficiency and ensuring that capital is not tied up in unsold goods.