What the turnover ratio is

When stock is plentiful, goods are always available, but cash sits on the shelf. When stock is thin, cash is not idle, but the risk of telling a customer "sold out" rises. The simplest metric that shows where you stand is the turnover ratio. It tells you how many times stock was fully replaced during a period.

Formula and example

Turnover = cost of goods sold in the period ÷ average inventory (at cost).

Example: over a year, goods sold cost 1,200 million so'm and average inventory was 300 million so'm. Turnover = 1,200 ÷ 300 = 4. So stock turned over four times a year, roughly once every three months.

In the numerator use cost, not sales revenue. Inventory is valued at cost, while revenue includes the markup. With a 30 percent markup, revenue is 1,200 × 1.3 = 1,560 million so'm and you get 1,560 ÷ 300 = 5.2, so turnover would look better than it really is.

How to get average inventory

The simplest way is half the sum of the opening and closing balances. But with seasonal sales it misleads. Suppose stock is 250 million at the start of the year and 410 million at the end, before the holidays. The two-point average is 330, and turnover is 1,200 ÷ 330 ≈ 3.6. If you instead average the month-end balances of all twelve months (300 million in our example), you get 4.0. The second method reflects the real level of stock through the year more accurately.

How to read the result

Is "four" good or bad? There is no single answer. Drinks and everyday groceries turn over quickly; building materials, furniture and appliances more slowly. So compare with your own past periods and with similar categories, not with another business's figure.

Very high turnover may mean thin stock, that is, a risk of frequent stock-outs. Very low turnover points to tied-up cash and the risk of items becoming obsolete or expiring.

Set the goal in numbers: for example, raise turnover in the slow category from 1.5 to 2.5. That shows the stock you need: at the same cost, 120 ÷ 2.5 = 48 million so'm of stock is enough, so 80 − 48 = 32 million so'm is released. That cash can be redirected to fast-selling goods.

Calculate by category

The overall figure hides the problem. Let us split the example into three categories:

• Everyday goods: cost 700 million, stock 100 million — turnover 7.
• Household goods: cost 380 million, stock 120 million — turnover about 3.2.
• Seasonal and slow goods: cost 120 million, stock 80 million — turnover 1.5.

Total cost is 1,200, total stock 300, and overall turnover is again 4. Yet almost a quarter of the stock (80 million) sits in a category that supplies only a tenth of the cost. The decision follows from this. A practical order of work:

1. In the slow category, pick out positions with no sales in the last six months.
2. Stop placing new orders for them.
3. Agree a discount, sale in bundles or a return to the supplier.
4. After two or three months recalculate turnover and compare it with the earlier result.

Common mistakes

• Using revenue instead of cost: turnover is artificially inflated.
• Taking only the year-end balance: stock built up before a holiday or season distorts the result.
• Mixing periods. If quarterly cost is 330 million and average stock is 300 million, turnover is 1.1. To annualise, multiply by four: 4.4. Do not compare a quarterly figure with an annual one.
• Ignoring goods with no sales at all: they show not turnover but frozen stock, so list them separately.

Conclusion

The turnover ratio shows the link between stock and sales in a single number, but it is useful only with reliable balances and correct costs. So check the balances with a count first, then calculate by category. CountLab combines stock-count results with ABC/XYZ analysis and a management report to show which category has cash stuck in it.