How do you calculate inventory turnover?

Divide cost of goods sold for the period by the average inventory value at cost, where average inventory is the start and end values added and divided by 2. With 12,000,000 of cost of goods sold and an average inventory of 2,000,000, turnover is 6 times a year.

How do you calculate days on hand?

Divide the days in the period by inventory turnover. At 6 turns a year, days on hand is 365 ÷ 6 = 60.8 days: at the current rate of use, the stock on hand would last about 61 days. You can also divide average inventory by cost of goods sold per day and get the same number.

Should I use sales or cost of goods sold?

Use cost of goods sold. Inventory is valued at cost, so dividing sales by it mixes cost and selling price and overstates turnover by the margin. If you only have sales, the result is a rough figure; say so when you compare it.

What is a good inventory turnover?

It depends on the product and the business: a plant making perishable goods turns stock far faster than one making large engineered equipment. Compare your own figure by product family over time. A rising turnover with stable service means less cash is tied up; a rising turnover with more shortages and expediting means stock has been cut too far.

Does it matter if inventory changed a lot in the period?

Yes. A two-point average of the start and end values hides what happened in between, for example a seasonal build. If you have month-end values, average all of them instead and enter that average as both start and end. The calculator warns you when the stock changed by more than half its average.

How does lean change inventory turnover?

Lean aims at less stock waiting between steps and shorter lead times, which raises turnover. The usual levers are smaller batches, pull systems with sized kanban loops and more reliable suppliers, which also lets you hold less safety stock for the same service.

Free tool

Inventory turnover and days on hand calculator

Inventory turnover is how many times a business uses up and replaces its inventory in a period: cost of goods sold divided by average inventory at cost. Days on hand is the days in the period divided by turnover, which is how long the stock would last at the current rate of use. Fewer days on hand means less cash tied up in stock.

Average inventoryequalsStart inventory + End inventory divided by 2

Inventory turnoverequalsCost of goods sold divided by Average inventory

Days on handequalsDays in the period divided by Inventory turnover

Use inventory and cost of goods sold at cost, for the same period. For a year the period is 365 days.

Cost of goods sold

For the period, from the income statement

Days in the period

365 for a year, 90 for a quarter

Inventory at the start

Value at cost

Inventory at the end

Value at cost

Currency

Pre-filled with the worked example. Use inventory and cost of goods sold at cost, not at selling price.

Inventory turnover

6 times

Stock was used up and replaced 6 times in 365 days.

Days on hand

60.8 days

Days in the period ÷ turnover

Average inventory

$2,000,000

(Start + end) ÷ 2

Turns per year

Scaled to 365 days

How to calculate it

Four numbers from the balance sheet and income statement

Cost of goods sold is what the products you sold in the period cost to make or buy, from the income statement. Use the same period as the days below.

Inventory at the start and at the end are the inventory values on the balance sheet at those two dates. Raw material, work in process and finished goods can be added together, or calculated one at a time to see where the stock sits.

Days in the period is 365 for a year. For a quarter use 90 or 91; the calculator scales the turns to a year for you.

Turnover only helps if the stock figure is right. Count errors move it, so check that your records match the shelf with cycle counting, and see which items to hold least with ABC analysis. The levers that raise turnover safely are kanban loops sized from demand and lead time, and the right safety stock for each item.

Worked example

Illustrative numbers, not a benchmark

A plant with 12,000,000 of cost of goods sold in a year, 2,100,000 of inventory at the start of the year and 1,900,000 at the end.

1Average inventory = (2,100,000 + 1,900,000) ÷ 2 = 2,000,000.
2Inventory turnover = 12,000,000 ÷ 2,000,000 = 6.0 times.
3Days on hand = 365 ÷ 6.0 = 60.8 days.

Turnover 6.0, days on hand 60.8. If the plant cut stock to 1,500,000 at the same cost of goods sold, turnover would be 8.0 and days on hand 45.6, and about 500,000 less cash would be tied up.

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How LeanSuite helps

LeanSuite is not an inventory or planning system, so keep stock figures in your ERP. LeanSuite's Loss & Cost Management puts a cost on each loss, and its Loss Prioritization Matrix turns that data into an action plan ranked by cost.

See Loss & Cost Management

FAQ

Inventory turnover and days on hand calculator: common questions

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