Inventory turnover
Max Pechonis · Founder, Rebridge ·
Inventory turnover is how many times a year you sell through your stock and buy it again. A category that sells $120,000 of stock in a year while holding about $30,000 on the shelf turns four times. Higher means your money comes back faster. Lower means it sits.
What it looks like
Picture one shelf. Over a year you fill it, sell it, and fill it again. The number of times you do that is your turnover.
Both shops above spent the same money. The difference is how often they got it back. The shop turning four times had its cash free to spend again every three months. The other waited six.
How to work it out
You need two numbers, and both are in your point of sale.
What the stock cost you. Not what you sold it for. If you sold $200,000 at retail and you buy at roughly half, that is about $100,000. Accountants call this cost of goods sold.
What you usually had on the shelf. Not what is there today. Take the value at the end of each month and average the twelve.
Divide the first by the second. $100,000 of stock sold, against $25,000 usually on hand, is four turns.
One rule, and it is the one people get wrong. Both numbers must be on the same footing. If you use what you paid, use what you paid for both. If you use retail prices, use retail for both. Mixing them gives you a number that looks about right and is not.
Why it matters when you are buying
Turnover decides how much stock your plan says you should hold.
Take a category expecting to sell $10,000 next month. At four turns a year, the plan wants about three months of stock on the floor, so $30,000. At six turns it wants two months, so $20,000. Same sales, $10,000 difference in what you are told you can buy.
That is why a turn rate nobody has checked is expensive. It is not a report you read at the end of the year. It is a number sitting inside every buying decision you make.
What a good number looks like
There is no good number in the abstract, and anyone quoting one without naming a category should be ignored.
Published benchmarks for the same trade disagree by a factor of three. Some measure at cost, some at retail, and most do not say which. A figure that came from somebody else's shop tells you nothing about yours.
Your own last twelve months is the honest starting point. Work out what each category actually did, then decide what you want it to do.
Faster is not automatically better, either. Push too hard and you are empty in your best weeks, which costs sales that never appear in any report. Some categories are slow on purpose: cellar wine, high-end frames, anything where holding the stock is the point.
Turnover on its own does not tell you about profit
A category can turn quickly on thin margins and still tie up money to no great effect.
Two categories both at 50% margin are not equally good if one turns four times and the other once. The first earns four times the gross margin on the same money. That combination, margin and speed together, is what GMROI measures.
Turnover answers how fast. Margin answers how much. You need both before you decide a category is working.
Questions
What is a good inventory turnover rate?
There is no useful answer without naming a category, and any number quoted without saying whether it was measured at cost or at retail should be treated carefully. Published benchmarks for the same trade routinely differ by a factor of three. Your own last twelve months is a better starting point than anyone's average.
How do I calculate inventory turnover?
Divide what the stock you sold cost you, over twelve months, by what you usually had on the shelf during those twelve months. $100,000 of stock sold against $25,000 usually on hand is four turns. Use the same footing on both sides: cost and cost, or retail and retail.
Should I use the price I paid or the price I sell at?
Either, as long as you use the same one on both sides of the sum. Cost against cost is the common convention. The error that survives for years is cost on one side and retail on the other, because it produces a number in roughly the right range and nothing complains.
Why not just use the stock I have today?
Because today is one day. For anything seasonal it is usually the emptiest day of the year, which makes turnover look far better than it was. Average the month-end figures across twelve months instead.
Is inventory turnover the same as sell-through?
No. Sell-through is the share of what you had available that you sold, usually over one delivery or one season, and it cannot go above 100%. Turnover counts how many times the money cycled in a year. A style can sell through at 90% and belong to a category that only turns twice.
How does turnover relate to weeks of supply?
They are two views of the same thing. Weeks of supply looks forward from today and asks how long the stock on hand will last. Turnover looks back across a year. A category holding thirteen weeks of supply is running near four turns, but one changes every week and the other is a rate you plan against.
Should every category have its own turn rate?
Yes, wherever there is enough history to measure one. A store-wide figure averages categories that behave nothing alike. A garden center might turn annuals eight times and hand tools twice; a single figure of five describes neither.
What if a category sold out?
Its measured turnover is flattered, because it could not sell what it did not have. Treat the number as a ceiling rather than a result, and plan nearer what it would have done with stock on the floor.
How often should I recalculate it?
Once or twice a year, usually when you set the next season's plan. It moves slowly, so watching it monthly produces noise. A rate nobody has revisited in three years is planning against a shop that no longer exists.
Where does this number come from in Rebridge?
From your point of sale. Sales, stock on hand and open purchase orders sync automatically per category, so the figures behind a turn rate are the ones your shop actually produced rather than anything typed in by hand.