Should I use COGS or revenue in the formula?

Always COGS. The modern formula is COGS divided by average inventory at cost. Older textbooks sometimes show revenue divided by inventory at retail, but that inflates the ratio and obscures the cash picture. Stick with COGS over average inventory at cost for every comparison.

How do I calculate average inventory?

The quick method is beginning inventory plus ending inventory divided by 2. For more accuracy, average the month-end balances across the period. Both are valued at cost, not retail. If you run periodic counts, use the counted number. If you use perpetual inventory, pull it from your system.

What causes low inventory turnover?

Three usual culprits: overbuying at the assortment planning stage, slow-moving SKUs you have not killed yet, or a demand drop you have not matched with smaller reorders. Pull a 90-day sell-through report by SKU. The bottom 20 percent of SKUs almost always holds 40 to 60 percent of your idle cash.

How does turnover affect cash flow?

Turnover directly drives your cash conversion cycle. Every extra turn per year means the same inventory dollar generates another round of gross profit. A brand at 4x with 45 percent gross margin generates 180 percent of its inventory cost per year. At 8x it generates 360 percent. That is why turnover is a profitability lever, not just an operations metric.

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Inventory Turnover Calculator

Turnover tells you how fast inventory becomes revenue. Low turnover is dead cash on a shelf. High turnover is working capital doing its job.

Inventory Turnover = COGS ÷ Average Inventory

COGS for period ($)

Average inventory at cost ($)

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How to use this Inventory Turnover Calculator

Inventory turnover answers a simple question: how many times did we sell through our stock this year? If you hold $100,000 in inventory at cost and your COGS was $600,000, you turned 6 times. Cash recycled six times. Each turn is another chance to earn margin on the same dollar of capital.

Pair turnover with days-on-hand. A 6x turnover equals roughly 60 days of inventory on hand. Less than 30 days means you risk stockouts. More than 120 days means cash is frozen. The healthy zone for most DTC is 45 to 90 days, depending on lead time and demand volatility. Fashion and trend-sensitive categories need to turn faster than commodity goods.

Run this at the SKU level, not just brand-wide. A 4x brand average often hides heroes turning 20x and losers turning 0.5x. The losers are the ones tying up cash you could spend on more of what works. Liquidate, rebundle, or kill. Free up the capital.

Frequently Asked Questions

Most healthy DTC brands run 4x to 8x annually. Fashion brands push 8x to 12x because styles go stale. Supplements and beauty run 4x to 6x. Furniture and high-ticket home goods run 2x to 4x because lead times are long. The benchmark is always relative to your category's lead time and shelf life.

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