E-commerce
Inventory turnover, and the cash it is holding
How many times you sell through your stock, how many days it sits, and how much cash one extra turn would release.
How many times you sell through your stock, how many days it sits, and how much cash one extra turn would release.
Both inputs must be at cost. Inventory turnover divides cost of goods sold by AVERAGE inventory — using revenue instead of COGS overstates the ratio by roughly your gross margin, which is the most common way this number gets quoted wrongly. There is no universal good figure: a grocer turns stock weekly and a furniture brand a few times a year, and both can be well run.
Inventory turnover is how many times you sell and replace your stock in a period. Turnover = Cost of goods sold ÷ Average inventory, both at cost. Turn that into days and you get days inventory outstanding: how long a unit sits before it sells.
For an operator the days figure is the useful one, because it converts directly into cash. Stock is cash you have already spent and cannot spend again until it sells.
This is the error that makes most quoted turnover figures wrong. Inventory sits on the balance sheet at cost. Revenue is at retail price. Dividing revenue by inventory mixes the two and overstates turnover by roughly your gross margin — a business turning stock 4 times will appear to turn it 8 times at a 50% margin.
Use average inventory rather than the closing balance, too. A closing figure taken the week after a seasonal peak describes a moment, not the year.
| Turnover | Days of stock | What it usually indicates |
|---|---|---|
| Under 2x | 180+ days | Overstocked, or holding slow-moving lines. Cash is trapped |
| 2–4x | 90–180 days | Normal for high-value or long-lead-time goods |
| 4–8x | 45–90 days | Healthy for most consumer brands |
| 8–12x | 30–45 days | Tight. Efficient, if you are not going out of stock |
| Over 12x | Under 30 days | Either excellent, or you are stocking out and losing sales |
There is no universal good figure. A grocer turns stock weekly; a furniture brand a few times a year. Both can be well run. What matters is the direction of your own number and whether the stock you hold is the stock that sells.
A turnover figure that keeps rising can mean you are running too lean. Stockouts do not appear anywhere in this calculation: the lost sale never happened, so it never enters revenue or COGS. A business that turns stock 15 times and is out of its best seller three weeks a year looks more efficient than one that turns 8 times and never misses a sale.
Read turnover next to your stockout rate and your fill rate, not on its own.
Days inventory outstanding is one of the three legs of the cash conversion cycle: how long stock sits, plus how long customers take to pay, minus how long you take to pay suppliers. Shortening any of the three releases cash, and inventory is usually the leg with the most slack in it for a physical-product business.
An inventory figure is only as good as the count behind it. If your ledger and your warehouse disagree, turnover is arithmetic on a wrong number. We keep inventory, COGS and landed cost reconciled as part of the books — see e-commerce bookkeeping and e-commerce finance.