Stock arithmetic
Inventory turnover ratio
How many times a business sells through its average stock in a year. The higher the figure, the less money sits on the shelves for each pound of sales.
The formula takes one line. The work is in the two numbers it divides, and in a business selling across channels those numbers usually come from two systems that disagree.
The ratio
Cost of sales ÷ average stock value
Average stock is usually opening plus closing, divided by two. Both sides are at cost, never at selling price.
Days of stock
365 ÷ turnover ratio
The same measure in days: how long the average unit waits between arriving and being sold.
A worked example
Illustrative figures for a merchant with £1,200,000 of cost of sales in the year.
| Cost of sales for the year | £1,200,000 |
|---|---|
| Stock at cost, start of year | £260,000 |
| Stock at cost, end of year | £340,000 |
| Average stock | £300,000 |
| Turnover ratio | 4.0 times a year |
| Days of stock | 91 days |
Turnover falling
Stock is growing faster than sales. Either buying has run ahead of demand, or slow lines are building up behind the fast ones.
Turnover rising
Stock is working harder. Good, until it rises because shelves are empty and sales are being lost to stock-outs.
One figure for the business
An average across every line. A healthy overall ratio can hide a range where a fifth of the SKUs have gone a year without a sale.
The ratio is only as good as the ledger behind it
Stock value comes from whichever system holds the count and the cost. Cost of sales comes from the accounts. In a business selling through a store, a marketplace and a warehouse, those are often different systems, valued differently and closed on different days.
A turnover ratio built from two systems that disagree is a precise figure for the wrong thing. Fix where stock value lives first, and the ratio becomes a number worth managing to.
Where stock value should live, and how it reaches the accounts, is on accounting and stock. The reorder arithmetic that moves the ratio is on inventory planning.
A turnover figure you can manage to
Tell us where stock is counted, where it's valued and what the accounts run on. We'll reply with where the two disagree and what it takes to make them agree.