Inventory turnover equals cost of goods sold divided by average inventory; days on hand equals 365 divided by turnover. Oceanline Loans, a small-business funding broker in Idaho Falls, Idaho, explains the formulas, works a hypothetical example and explains why lenders look at turnover when they finance stock. Credit decisions and terms come from lending partners.
| Turnover | Cost of goods sold / average inventory |
|---|---|
| Average inventory | (Beginning + ending inventory) / 2 |
| Days on hand | 365 / turnover |
| Done by | Hand or spreadsheet; this page has no automatic calculator |
The inventory turnover ratio formula
Inventory turnover = cost of goods sold ÷ average inventory
Use cost of goods sold (COGS), not sales, because inventory is carried at cost. Using sales overstates turnover by the size of your markup. Use the same period for both figures, normally a full year.
Average inventory = (inventory at the start of the period + inventory at the end) ÷ 2
If stock swings a lot during the year, average the month-end balances instead of only the first and last. A single year-end count can be unusually low or high and distort the result.
How to calculate inventory turnover days
Days on hand = 365 ÷ inventory turnover, or equivalently, average inventory ÷ COGS × 365.
Days on hand, also called days inventory outstanding, says roughly how long an item sits before it sells. For a quarter, use 91 days and the quarter's COGS instead.
A worked example with hypothetical numbers
| Step | Figure | Working |
|---|---|---|
| Cost of goods sold for the year | $600,000 | From the income statement |
| Inventory at start of year | $140,000 | From last year's balance sheet |
| Inventory at end of year | $160,000 | From this year's balance sheet |
| Average inventory | $150,000 | ($140,000 + $160,000) / 2 |
| Inventory turnover | 4.0 turns | $600,000 / $150,000 |
| Days on hand | about 91 days | 365 / 4.0 |
Read that as: the store sells through its average stock about four times a year, so a typical item sits on the shelf for about three months.
Your own figures
| Step | Your figure | Working |
|---|---|---|
| A. Cost of goods sold, last 12 months | Income statement | |
| B. Inventory at start of period | Balance sheet | |
| C. Inventory at end of period | Balance sheet | |
| D. Average inventory | (B + C) / 2 | |
| E. Inventory turnover | A / D | |
| F. Days on hand | 365 / E |
For a more detailed view, calculate turnover for each product category. A store-wide average can hide a slow category behind a fast one.
Inventory turnover ratio interpretation
There is no single good number. A grocer turns stock far faster than a jeweler, and a parts distributor carrying slow-selling but necessary items will turn more slowly than a convenience store. Three comparisons are more useful than any benchmark:
- Your own trend. Falling turnover means stock is building faster than it sells: tied-up cash, and possibly obsolete goods.
- Your categories. Which lines turn slowest, and is the margin on them worth the wait?
- Your supplier and customer terms. If suppliers want payment in 30 days and stock sits 90, the business is financing 60 days of inventory itself.
Very high turnover is not automatically good either. It can mean stock-outs and lost sales.
Why lenders look at turnover
When stock secures a loan or line, the lender needs to know how quickly it could be turned back into cash. Slow-moving inventory is often excluded from the borrowing base, and a falling turnover trend can reduce how much a lender will advance against stock. Lenders set their own thresholds and methods; we do not publish any, because each partner decides for itself.
Knowing your turnover before you apply helps you size a request realistically. Buying more stock than the business can sell in a reasonable time raises the financing cost on every unit. Inventory financing and lines of credit explain the products, and more guides are in the guide library.
Stock-carrying businesses in Bonneville County, ID
Bonneville County had 517 retail and 201 wholesale employer establishments in 2023 (U.S. Census Bureau, County Business Patterns 2023), plus 1,038 retail businesses without employees in 2024 (U.S. Census Bureau, Nonemployer Statistics 2024). For most of them, inventory is the largest asset after cash, and turnover is the simplest way to see whether it is working.
By Oceanline Loans · Updated