Inventory turnover
Inventory turnover says how many times in a given period a company sold and replaced its stock. It is calculated as cost of goods sold divided by the average inventory value for the same period, with both sides taken at purchase cost.
The formula only works when the numerator and the denominator are measured the same way. Cost of goods sold for the year divided by average inventory value, for example the average of month-end balances, gives the number of turns. The same result converts into days: 365 divided by the number of turns is the average number of days goods sit in the warehouse.
In a wholesale business the useful view is not one company-wide figure but a breakdown by product group, supplier, branch and item. The average looks respectable even when a few fast movers pull it up while stock next to them has not moved in a year. ABC/XYZ analysis and a slow-mover report show what the average hides.
Several things distort the result: seasonality (fertilisers, building materials or school supplies measured quarter by quarter look nothing like year on year), goods in transit and reservations, a one-off promotional buy, and in food and OTC pharma the batches close to expiry that go out first under FEFO anyway. Figures presented as "industry norms" circulate in slide decks, but turnover is comparable only when it is calculated the same way inside the same company.
Why measure it: turnover shows how much cash is standing on the shelf and informs the reorder point. A slow-moving item with a six-week lead time is a different buying decision from an item a supplier ships overnight, and without a breakdown both look the same in the report.