The formula
Turnover = cost of goods sold ÷ average inventory
What it means
Turnover measures how fast inventory becomes sales. A turnover of ten means the warehouse renews itself ten times a year, that is, every 36 days. The higher it is, the less money tied up per unit of sales, and that frees cash. But very high also means running close to the edge, where any supplier delay leaves the shelf empty.
How to work it out by hand
- Take the cost of goods sold for the period, not the revenue
- Work out average inventory: the mean of opening and closing, valued at cost
- Divide cost of goods sold by average inventory
- Divide the days in the period by the turnover for days of inventory
What is worth knowing
The classic mistake is dividing revenue by inventory: since revenue carries the margin inside it and inventory is valued at cost, turnover comes out inflated by exactly the margin. At a fifty per cent margin the figure comes out twice what it is. And there is no universally good turnover: a supermarket runs around twenty and a jeweller may sit at two without either doing anything wrong.