Inventory turnover is how many times a year you use up and replace your stock: cost of goods sold divided by average inventory, both at cost. A business that used $142,000 of stock in a year while holding $4,500 on average turned its inventory about 32 times, so stock sat for about 11 days before it was used. Higher turnover means less cash on the shelf and less to expire; too high means running out. For a maker, the useful version is per item, set against each item's shelf life, because one slow ingredient can expire while the business average looks fine. Below is the formula, a year worked through, the item-by-item view, and how to raise turnover without running short.
The short version
- Turnover = cost of goods sold ÷ average inventory, both at cost.
- Average inventory = (opening + closing) ÷ 2, or better, the average of month-end values.
- Days on hand = 365 ÷ turnover.
- Work it out per item, not only for the business.
- For anything perishable, days on hand must be well under its shelf life.
- Raise turnover by ordering smaller and more often, cutting slow items, and reordering from real use.
- TaroStack shows each item's days of cover and what isn't moving. More below.
The formula
Average inventory = (opening inventory + closing inventory) ÷ 2
Turnover = cost of goods sold ÷ average inventory
Days on hand = 365 ÷ turnover
Use cost for both, never sales prices: inventory is valued at cost, so cost of goods sold has to be too. If your stock swings a lot through the year, average the twelve month-end values instead of using only the opening and closing ones.
A year, worked through
Windward Roots, the made-up taro business I use in these examples, values its stock at the start and end of the year:
Opening inventory, Jan 1 $4,200
Closing inventory, Dec 31 $4,753
Average inventory ($4,200 + $4,753) ÷ 2 = $4,476.50
Cost of goods sold $142,000
Turnover $142,000 ÷ $4,476.50 = 31.7 times a year
Days on hand 365 ÷ 31.7 = 11.5 days
Eleven and a half days of stock, on average, is healthy for a business making fresh food. But it's an average across flour, butter, cream, pouches, labels and finished chips, and that average hides the problem.
Item by item, against shelf life
| Item | Used in a year, at cost | Average on hand | Turns | Days on hand | Shelf life |
|---|---|---|---|---|---|
| Taro chips, finished | $76,440 | $1,344 | 56.9 | 6.4 | 90 days |
| Butter | $9,400 | $180 | 52.2 | 7.0 | About 2 months, chilled |
| Bread flour | $5,200 | $170 | 30.6 | 11.9 | About 6 months |
| Coconut cream, fresh | $2,500 | $170 | 14.7 | 24.8 | 14 days |
| Printed chip pouches | $11,284 | $1,550 | 7.3 | 50.1 | Doesn't expire |
| Labels | $1,456 | $240 | 6.1 | 60.2 | Doesn't expire |
Read the last two columns together. The chips sit for about 6 days of a 90-day life, which is fine. The pouches and labels turn slowly, but they don't expire, so the only cost is cash on the shelf, a trade made on purpose to meet a printer's minimum, as in minimum order quantity. The coconut cream is the problem: about 25 days on hand for a two-week life means some of it expires every month, however good the business average looks. That's the write-off found behind newer cartons in stock rotation methods.
What a good turnover is
There isn't one number. For perishables, the test is days on hand against shelf life: comfortably under it, with room for the buyer's own shelf life if you sell wholesale. For things that don't expire, the test is cash: how much is sitting on the shelf, and is it there because of a price break you chose, or because nobody looked? Comparing your business average with an industry average tells you less than comparing each item with its own life.
Turnover that's too high has a cost too. Ordering butter every day means freight on every order and no buffer when a delivery is late. The aim is days on hand close to what lead time and safety need, which is worked out in how much inventory to keep on hand.
How to raise turnover
| Lever | What to do | On the example |
|---|---|---|
| Order smaller, more often | Match orders to use, within the supplier's minimum | Coconut cream twice a week instead of weekly |
| Reorder from real use | Set reorder points from how stock moves, not habit | Fewer cases bought "in case" |
| Cut slow items | Drop or make to order what barely sells | One fewer flavor of chips |
| Use oldest first | Rotate by date so stock doesn't age at the back | The cream behind newer cartons |
| Sell down excess | Specials and bundles for what's piling up | Short-dated stock into a weekend special |
Your inventory value, which the turnover formula depends on, is covered in what is inventory valuation.
Where this stops working
Turnover from the accounts arrives once a year and says one number. To see the coconut cream, you need each item's use and average stock, by month, at cost, which means every delivery, batch and write-off recorded and a stock value at every month end. On a spreadsheet, that's a project for a quiet week that never comes, so the slow item stays slow and the expiring one keeps expiring.
How TaroStack does it
TaroStack keeps the numbers turnover is made of, item by item, every day, and points at the items that need attention.
Days of cover, per item. The reorder list shows every item in days of cover at the rate it's really going out, which is days on hand looked at from the other end. Reorder points are suggested from how stock actually moves, and the suggested order counts what's already on order and rounds up to the supplier's pack size and minimum, so you order what you'll use rather than what you used to.
What isn't moving, and what will expire. Stock that isn't moving shows how long since it last went out, so slow money is visible. TaroStack forecasts what will expire before it's used and what that stock cost, lot by lot, which is the coconut cream caught before the write-off rather than after. The oldest date goes first everywhere stock is picked.
The value under the ratio. Stock value is kept at what it really cost, per site and per item, with a month-by-month history and a chart, so the average inventory is there without a count. Batches take ingredients off at their actual cost, and every write-off carries its reason, so the losses report shows what expired, where and what it cost.
| The question | From the accounts | In TaroStack |
|---|---|---|
| How fast does stock turn? | Once a year, one number | Days of cover, per item, live |
| Which item is too slow? | Nobody knows | Stock not moving, with days since it last went out |
| Will it expire first? | Found at the back of the shelf | Expiry forecast, with its cost |
| Average inventory | A count at year end | Stock value by month |
Stock value, counts, lots, expiry, the reorder list and the losses report are on every plan, from $49 a month; recipes and batches are on Standard at $99. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.