Inventory Turnover Benchmarks by Industry

This is a positive sign as it means that the business is not tying up too much capital in unsold inventory. Looking at how inventory turnover ratios change over time can reveal some interesting trends and insights. For example, if the turnover ratio is going up, it might mean sales are picking up and inventory management is on point. On the flip side, a decreasing ratio could be a sign of trouble, like overstocking or sales slipping. Understanding these trends helps businesses adjust their strategies to keep inventory levels in check.

Low turnover ratios may mean overstocking, weak demand, or production declines. A high inventory turnover ratio is usually a good sign, showing that sales are strong and inventory management is on point. This is great because it means less money is tied up in stock, which can improve cash flow. Plus, it shows that a company is doing a good job of meeting customer demand. The inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory balance for the matching period.

With built-in turnover tracking and benchmarking, you’ll always know how your inventory is performing. While AGR integrates seamlessly with Power BI for intuitive visualisation—including a pre-built dashboard for real-time turnover tracking—it also offers an open API. This allows your team to access inventory data directly and build custom dashboards, reports, or tracking systems in the tools you already use. Whether you rely on Power BI or prefer a fully tailored analytics setup, AGR makes it easy to monitor inventory turnover from any angle. Manual tracking of turnover ratio across SKUs is time-consuming and error prone. A modern inventory management system like AGR’s automates turnover calculations, flags anomalies, and links directly to your forecasting engine.

Let’s imagine a small DTC brand called „Wanderlust Coffee Co.,” which sells artisanal coffee beans online. Getting your COGS right is absolutely fundamental, and different accounting methods can impact this figure. To make sure you’re using the best approach for your business, it’s a good idea to master inventory valuation methods for better accounting. Once you have a solid grip on both COGS and average inventory, you’re all set to calculate a turnover ratio you can actually trust.

In the sections that follow, we’ll break down how to calculate inventory turnover, what benchmarks to aim for, and how to interpret your results in context. If your current tools can’t provide real-time inventory insights or scale with growing complexity, it might be time to evaluate whether your business is ready for a modern ERP like NetSuite. Gain full visibility into your inventory performance through automated, accurate, and real-time data with Wafeq.

Right-Sized for Growing Multichannel Businesses

A higher ITR number may signify a better inventory procurement and effective use of resources allocated to promote sales. Other names used for this ratio include stock turnover ratio, inventory turns, stock turns and rate of stock turnover. Finale Inventory provides growing ecommerce and wholesale businesses the tools needed to optimize turnover. From automated costing to mobile scanning and seamless QuickBooks/Xero integrations, the platform delivers clarity that converts insights into profit. Finale Inventory is specifically designed for multichannel e-commerce and wholesale businesses shipping between 500 and 100,000 orders monthly.

POS Systems

• Rather than being a positive sign, high turnover could mean that the company is missing potential sales due to insufficient inventory.
• Thus, the inventory turnover ratio might not provide a clear comparison across different sectors.
• Conversely, a low inventory turnover ratio could signal poor sales performance or over-investment in slow-moving products.
• While beneficial in the short term, these events often outpace inventory planning and strain fulfillment teams.

Conversely, a low inventory turnover ratio could signal poor sales performance or over-investment in slow-moving products. Before interpreting the inventory turnover ratio and making an opinion about a firm’s operational efficiency, it is important to investigate how the firm assigns cost to its inventory. For example, companies using FIFO cost flow assumption may have a lower ITR number in days of inflation because the latest inventory purchased at higher prices remain in stock under FIFO method.

Improved demand forecasting

• Conversely, the companies using LIFO cost flow assumption may have comparatively a higher ratio than others because the oldest inventory purchased at lower prices remain in stock under LIFO method.
• This key metric reveals how efficiently you’re converting inventory into sales, directly impacting cash flow, warehouse space utilization, and profitability.
• A comprehensive analysis might involve examining specific product lines to identify which items contribute to lower turnover rates.
• Businesses operating with a just-in-time (JIT) inventory model often have high turnover ratios but must balance carefully to avoid disruptions.
• If a shipment is delayed or demand spikes unexpectedly, stockouts and service delays follow.

Effective inventory management is essential for businesses aiming to optimize operations and increase profitability. inventory turnover ratio analysis A key metric that offers insights into a company’s stock management efficiency is the inventory turnover ratio. This measure reflects how often inventory is sold and replaced over a period, highlighting potential areas for improvement in supply chain processes. When you notice a low inventory turnover ratio, it might be a sign that sales aren’t as strong as they could be, or perhaps there’s just too much stock sitting around. This can happen for a bunch of reasons, like seasonal demand shifts, holding onto pricey, slow-moving items, or not having the best inventory management practices in place. For example, sometimes businesses might be a bit too optimistic about future sales during busy seasons, leading to a pile-up of excess inventory.

Improving Your Inventory Turnover: Strategic Approaches

This precision ensures your inventory turnover ratio calculations reflect true product costs rather than estimates. Unlike turnover ratio which counts frequency, DSI quantifies duration in days. For calculation methods, refer to our days inventory outstanding guide which provides complete formulas and industry benchmarks. When analyzing your inventory turnover ratio, understanding what the numbers actually reveal about your business operations is crucial for making informed decisions.

How to Improve Inventory Turnover Ratio

As you can see in the screenshot, the 2015 inventory turnover days is 73 days, which is equal to inventory divided by cost of goods sold, times 365. You can calculate the inventory turnover ratio by dividing the inventory days ratio by 365 and flipping the ratio. Inventory turnover is an efficiency/activity ratio which estimates the number of times per period a business sells and replaces its entire batch of inventories. It is the ratio of cost of goods sold by a business during an accounting period to the average inventories of the business during the period (usually a year). Industries with high inventory turnover have strong sales and efficient inventory management.

For more precision, many businesses calculate average inventory using monthly or quarterly values rather than simply beginning and ending figures. This approach produces more accurate results for businesses with seasonal fluctuations. This calculation provides insight into how many times you “turn” your inventory during the measurement period. A ratio of 6 means you effectively sell and replace your entire inventory six times annually. Closely linking procurement activities to demand data helps reduce excess ordering and long inventory holding periods.

How Can Inventory Turnover Be Improved?

More specifically, inventory turnover rates measure the number of times a business sells through its assets in a set time period (a month, a quarter, or, most commonly, a year). One complete turnover of inventory means the company sold the stock that it purchased—and that’s a good thing. It’s vital—and not always easy—for retailers to understand what inventory is moving and how quickly. Understanding your inventory turnover ratio is one of the most effective ways to assess how efficiently your business is managing its stock.

A company with $1,000 of average inventory and sales of $10,000 effectively sold its 10 times over. Effective inventory management is key for a good turnover ratio, and it also affects pricing strategies and supplier relations. Advanced inventory management systems can give you insights to help adjust inventory levels to match customer demand.

Checklist: How to Improve Inventory Turnover Ratio

For those looking to calculate inventory turnover ratios, a simple calculator can be a real lifesaver. By inputting your COGS and average inventory value, you can quickly calculate the inventory turnover ratio and gain insights into your inventory management efficiency. Whether you calculate by value or quantity, understanding this metric is crucial for optimizing inventory levels and improving overall business performance. Suppose a company has a COGS of $5 million and an average inventory of $500,000.

Your Cost of Goods Sold (COGS) is based on what you paid for the products, so the average inventory value has to be calculated the same way. If you mix retail value in the denominator with cost in the numerator, you’ll completely distort the ratio and end up with a number that doesn’t mean anything. To give you a better idea of how much this can vary, here’s a quick look at some typical inventory turnover ratios across different industries. It’s a great way to get a ballpark figure for what you should be aiming for.