How do I calculate the inventory turnover?

Inventory turnover rate is a key performance indicator that shows how frequently goods are replaced in storage over a given period. The higher the turnover, the more efficient the warehouse is, as a lower storage time means less capital is tied up. This allows the company to convert inventory back into liquid assets faster, thereby improving profitability. The inventory turnover rate is considered an important success metric, and can also be applied to individual product groups, where it is often referred to as product rotation.

To increase inventory turnover, companies can eliminate downtimes, implement just-in-time delivery models, remove low-performing products, or optimize their internal logistics processes. The ideal turnover rate is industry-dependent. For instance, supermarkets have a much higher turnover rate than car dealerships.

To calculate the average inventory, the formula is:

Average inventory = (Opening inventory + Closing inventory) / 2

Once the average inventory is known, the inventory turnover rate can be calculated using:

Inventory turnover = Inventory withdrawals / Average inventory

or:

Inventory turnover = Annual sales / Average inventory